Bayesian Analysis of Bubbles in Asset Prices

We develop a new asset price model where the dynamic structure of the asset price, after the fundamental value is removed, is subject to two different regimes. One regime reflects the normal period where the asset price divided by the dividend is assumed to follow a mean-reverting process around a s...

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Main Authors: FULOP, Andras, YU, Jun
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Language:English
Published: Institutional Knowledge at Singapore Management University 2014
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Online Access:https://ink.library.smu.edu.sg/soe_research/1589
https://ink.library.smu.edu.sg/context/soe_research/article/2588/viewcontent/04_2014.pdf
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spelling sg-smu-ink.soe_research-25882019-04-19T08:36:12Z Bayesian Analysis of Bubbles in Asset Prices FULOP, Andras YU, Jun We develop a new asset price model where the dynamic structure of the asset price, after the fundamental value is removed, is subject to two different regimes. One regime reflects the normal period where the asset price divided by the dividend is assumed to follow a mean-reverting process around a stochastic long run mean. This latter is allowed to account for possible smooth structural change. The second regime reflects the bubble period with explosive behavior. Stochastic switches between two regimes and non-constant probabilities of exit from the bubble regime are both allowed. A Bayesian learning approach is employed to jointly estimate the latent states and the model parameters in real time. An important feature of our Bayesian method is that we are able to deal with parameter uncertainty, and at the same time, to learn about the states and the parameters sequentially, allowing for real time model analysis. This feature is particularly useful for market surveillance. Analysis using simulated data reveals that our method has better power for detecting bubbles compared to existing alternative procedures. Empirical analysis using price/dividend ratios of S&P500 highlights the advantages of our method. 2014-07-01T07:00:00Z text application/pdf https://ink.library.smu.edu.sg/soe_research/1589 https://ink.library.smu.edu.sg/context/soe_research/article/2588/viewcontent/04_2014.pdf http://creativecommons.org/licenses/by-nc-nd/4.0/ Research Collection School Of Economics eng Institutional Knowledge at Singapore Management University Parameter Learning Markov Switching MCMC Econometrics Finance
institution Singapore Management University
building SMU Libraries
continent Asia
country Singapore
Singapore
content_provider SMU Libraries
collection InK@SMU
language English
topic Parameter Learning
Markov Switching
MCMC
Econometrics
Finance
spellingShingle Parameter Learning
Markov Switching
MCMC
Econometrics
Finance
FULOP, Andras
YU, Jun
Bayesian Analysis of Bubbles in Asset Prices
description We develop a new asset price model where the dynamic structure of the asset price, after the fundamental value is removed, is subject to two different regimes. One regime reflects the normal period where the asset price divided by the dividend is assumed to follow a mean-reverting process around a stochastic long run mean. This latter is allowed to account for possible smooth structural change. The second regime reflects the bubble period with explosive behavior. Stochastic switches between two regimes and non-constant probabilities of exit from the bubble regime are both allowed. A Bayesian learning approach is employed to jointly estimate the latent states and the model parameters in real time. An important feature of our Bayesian method is that we are able to deal with parameter uncertainty, and at the same time, to learn about the states and the parameters sequentially, allowing for real time model analysis. This feature is particularly useful for market surveillance. Analysis using simulated data reveals that our method has better power for detecting bubbles compared to existing alternative procedures. Empirical analysis using price/dividend ratios of S&P500 highlights the advantages of our method.
format text
author FULOP, Andras
YU, Jun
author_facet FULOP, Andras
YU, Jun
author_sort FULOP, Andras
title Bayesian Analysis of Bubbles in Asset Prices
title_short Bayesian Analysis of Bubbles in Asset Prices
title_full Bayesian Analysis of Bubbles in Asset Prices
title_fullStr Bayesian Analysis of Bubbles in Asset Prices
title_full_unstemmed Bayesian Analysis of Bubbles in Asset Prices
title_sort bayesian analysis of bubbles in asset prices
publisher Institutional Knowledge at Singapore Management University
publishDate 2014
url https://ink.library.smu.edu.sg/soe_research/1589
https://ink.library.smu.edu.sg/context/soe_research/article/2588/viewcontent/04_2014.pdf
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