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This paper applies two tests of asymmetry to examine if the quality of a country's financial disclosure system affects the likelihood of speculative bubbles. We examine the hypothesis that stock prices of firms in countries with a low level of financial disclsoure are more likely to experience bubbles. The countries, ranked in order of disclosure levels, are the United States, Canada, the United Kingdom, the Netherlands, France, Japan, Germany, and Switzerland (Saudagaran and Biddle (1992)). The findings based on the third-order Markov chain test suggest the presence of asymmetry in dollar-denominated quarterly real returns of Japan, a country with a relatively low level of disclosure. The asymmetric pattern is due to the non-random walk return pattern of Japan. The results based on the time reversibility test indicate that monthly real returns in both dollar-denominated and local currencies of Germany increase slower than they decrease. Such "slow-up and fast-down" dynamic is consistent with the presence of a bubble.

Financial Disclosure and Speculative Bubbles: An International Test of Asymmetry