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TESTING FOR SPECULATIVE BUBBLES USING SPOT AND FORWARD PRICES
Author(s) -
Pavlidis Efthymios G.,
Paya Ivan,
Peel David A.
Publication year - 2017
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/iere.12249
Subject(s) - futures contract , spot contract , economics , econometrics , liberian dollar , forward price , monetary economics , asset (computer security) , equity (law) , financial economics , forward rate , hyperinflation , interest rate , computer science , finance , monetary policy , computer security , political science , law
Abstract The probabilistic structure of periodically collapsing bubbles creates a gap between future spot and forward (futures) asset prices in small samples. By exploiting this fact, we use a recently developed recursive unit root test and rolling Fama regressions for detecting bubbles. Both methods do not rely on a particular model of asset price determination, are robust to explosive fundamentals, and allow date stamping. An application to U.S. dollar exchange rates provides evidence of bubbles during the interwar German hyperinflation, but not during the recent floating‐rate period. A further application to S&P 500 supports the existence of bubbles in the U.S. equity market.