European Business Schools Librarian's Group
ESSEC Working Papers,
ESSEC Research Center, ESSEC Business School
No WP1314: Detecting and Forecasting Large Deviations and Bubbles in a Near-Explosive Random Coefficient Model
Anurag N. Banerjee (), Guillaume Chevillon () and Marie Kratz ()
Additional contact information
Anurag N. Banerjee: Durham University Business School, Postal: Durham University Business School, Durham University, Mill Hill Lane, DURHAM DH1 3LB, UNITED KINGDOM
Guillaume Chevillon: ESSEC Business School, Postal: Avenue Bernard Hirsch - B.P. 50105, 95021 CERGY-PONTOISE Cedex, FRANCE
Marie Kratz: ESSEC Business School et Mathématiques appliquées Paris 5 (MAP5), Postal: Avenue Bernard Hirsch - B.P. 50105, 95021 CERGY-PONTOISE Cedex, FRANCE
Abstract: This paper proposes a Near Explosive Random-Coefficient autoregressive model for asset pricing which accommodates both the fundamental asset value and the recurrent presence of autonomous deviations or bubbles. Such a process can be stationary with or without fat tails, unit-root nonstationary or exhibit temporary exponential growth. We develop the asymptotic theory to analyze ordinary least-squares (OLS) estimation. One important theoretical observation is that the estimator distribution in the random coefficient model is qualitatively different from its distribution in the equivalent fixed coefficient model. We conduct recursive and full-sample inference by inverting the asymptotic distribution of the OLS test statistic, a common procedure in the presence of localizing parameters. This methodology allows to detect the presence of bubbles and establish probability statements on their apparition and devolution. We apply our methods to the study of the dynamics of the Case-Shiller index of U.S. house prices. Focusing in particular on the change in the price level, we provide an early detection device for turning points of booms and bust of the housing market.
Keywords: Bubbles; Random Coefficient Autoregressive Model; Local Asymptotics; Asset Prices
46 pages, September 2013
Full text files
WP1314.pdf
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