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Testing for a rational bubble under long memory

Michael Frömmel UGent and Robinson Kruse (2011) QUANTITATIVE FINANCE. 12(11). p.1723-1732
abstract
We analyse the time series properties of the S&P500 dividend–price ratio in the light of long-memory, structural breaks and rational bubbles. We find an increase in the long-memory parameter in the early 1990s by applying a test recently proposed by Sibbertsen and Kruse [J. Time Series Anal., 2009, 30, 263–285]. An application of the unit root test against long memory of Demetrescu et al. [Econometr. Theory, 2008, 24, 176–215] suggests that the prebreak data can be characterized by long memory, while the post-break sample contains a unit root. These results reconcile two empirical findings that are seen as contradictory: on the one hand, they confirm the existence of fractional integration in the S&P500 log-dividend–price ratio and, on the other, they are consistent with the existence of a rational bubble. The result of a changing memory parameter in the dividend–price ratio has an important implication for the literature on return predictability: the shift from a stationary dividend–price ratio to a unit root process in 1991 is likely to have caused the well-documented failure of conventional return prediction models since the 1990s.
Please use this url to cite or link to this publication:
author
organization
year
type
journalArticle (original)
publication status
published
subject
keyword
Changing persistence, Fractional integration, Dividend–price ratio, Rational bubbles
journal title
QUANTITATIVE FINANCE
Quant. Financ.
volume
12
issue
11
pages
1723 - 1732
Web of Science type
Article
Web of Science id
000309720100009
JCR category
ECONOMICS
JCR impact factor
0.735 (2011)
JCR rank
168/320 (2011)
JCR quartile
3 (2011)
ISSN
1469-7688
DOI
10.1080/14697688.2011.578151
language
English
UGent publication?
yes
classification
A1
copyright statement
I have transferred the copyright for this publication to the publisher
id
1887509
handle
http://hdl.handle.net/1854/LU-1887509
date created
2011-08-10 18:28:34
date last changed
2015-06-17 09:49:35
@article{1887509,
  abstract     = {We analyse the time series properties of the S\&P500 dividend--price ratio in the light of long-memory, structural breaks and rational bubbles. We find an increase in the long-memory parameter in the early 1990s by applying a test recently proposed by Sibbertsen and Kruse [J. Time Series Anal., 2009, 30, 263--285]. An application of the unit root test against long memory of Demetrescu et al. [Econometr. Theory, 2008, 24, 176--215] suggests that the prebreak data can be characterized by long memory, while the post-break sample contains a unit root. These results reconcile two empirical findings that are seen as contradictory: on the one hand, they confirm the existence of fractional integration in the S\&P500 log-dividend--price ratio and, on the other, they are consistent with the existence of a rational bubble. The result of a changing memory parameter in the dividend--price ratio has an important implication for the literature on return predictability: the shift from a stationary dividend--price ratio to a unit root process in 1991 is likely to have caused the well-documented failure of conventional return prediction models since the 1990s.},
  author       = {Fr{\"o}mmel, Michael and Kruse, Robinson},
  issn         = {1469-7688},
  journal      = {QUANTITATIVE FINANCE},
  keyword      = {Changing persistence,Fractional integration,Dividend--price ratio,Rational bubbles},
  language     = {eng},
  number       = {11},
  pages        = {1723--1732},
  title        = {Testing for a rational bubble under long memory},
  url          = {http://dx.doi.org/10.1080/14697688.2011.578151},
  volume       = {12},
  year         = {2011},
}

Chicago
Frömmel, Michael, and Robinson Kruse. 2011. “Testing for a Rational Bubble Under Long Memory.” Quantitative Finance 12 (11): 1723–1732.
APA
Frömmel, M., & Kruse, R. (2011). Testing for a rational bubble under long memory. QUANTITATIVE FINANCE, 12(11), 1723–1732.
Vancouver
1.
Frömmel M, Kruse R. Testing for a rational bubble under long memory. QUANTITATIVE FINANCE. 2011;12(11):1723–32.
MLA
Frömmel, Michael, and Robinson Kruse. “Testing for a Rational Bubble Under Long Memory.” QUANTITATIVE FINANCE 12.11 (2011): 1723–1732. Print.