Testing for rational speculative bubbles in the Brazilian residential real-estate market

Speculative bubbles have been occurring periodically in local or global real estate markets and are considered a potential cause of economic crises. In this context, the detection of explosive behaviors in the financial market and the implementation of early warning diagnosis tests are of critical importance. The recent increase in Brazilian housing prices has risen concerns that the Brazilian economy may have a speculative housing bubble. In the present paper, we employ a recently proposed recursive unit root test in order to identify possible speculative bubbles in data from the Brazilian residential real-estate market. The empirical results show evidence for speculative price bubbles both in Rio de Janeiro and Sao Paulo, the two main Brazilian cities

Testing for Multiple Bubbles 1: Historical Episodes of Exuberance and Collapse in the S&P 500

Published in International Economic Review, https://doi.org/10.1111/iere.12132</p

Testing for Explosive Behaviour in Relative Inflation Measures: Implications for Monetary Policy

In this paper we test for large deviations in headline measures of the price level relative to core measures using the recently proposed test of Phillips et al. (2011a). We find evidence of explosive behaviour in the headline price index of personal consumption expenditures (PCE) relative to the core PCE (less food and energy prices) on three occasions from 1982-2010. Two of these episodes correspond to energy supply shocks (OPEC price collapse of 1986 and Hurricane Katrina). The third one is during March 2008 through September 2008 which seems to be driven by both food and energy prices as these indices exhibit explosive behaviour. We also find evidence suggesting that inflation expectations behave differently under normal and explosive periods. In particular, unemployment and interest rates also help predict inflation expectations during explosive episodes relative to normal times. Furthermore, explosive episodes in the relative measure between headline and core inflation is found to be more important than the relative volatile periods implied by a Markov-switching model when studying inflation expectations. The findings of this paper suggest that explosive behaviour of headline versus core PCE should be taken into account when conducting monetary policy as it is a key determinant in consumers’ inflation expectations.Explosive behaviour, core inflation, relative measure, inflation expectations

Testing for Multiple Bubbles

Identifying and dating explosive bubbles when there is periodically collapsing behavior over time has been a major concern in the economics literature and is of great importance for practitioners. The complexity of the nonlinear structure inherent in multiple bubble phenomena within the same sample period makes econometric analysis particularly difficult. The present paper develops new recursive procedures for practical implementation and surveillance strategies that may be employed by central banks and fiscal regulators. We show how the testing procedure and dating algorithm of Phillips, Wu and Yu (2011, PWY) are affected by multiple bubbles and may fail to be consistent. The present paper proposes a generalized version of the sup ADF test of PWY to address this difficulty, derives its asymptotic distribution, introduces a new date-stamping strategy for the origination and termination of multiple bubbles, and proves consistency of this dating procedure. Simulations show that the test significantly improves discriminatory power and leads to distinct power gains when multiple bubbles occur. Empirical applications are conducted to S&P 500 stock market data over a long historical period from January 1871 to December 2010. The new approach identifies many key historical episodes of exuberance and collapse over this period, whereas the strategy of PWY and the CUSUM procedure locate far fewer episodes in the same sample range.Date-stamping strategy, Generalized sup ADF test, Multiple bubbles, Rational bubble, Periodically collapsing bubbles, Sup ADF test

Dynamics of the European sovereign bonds and the identification of crisis periods

We develop an empirical model of heterogeneous agents to study the dynamics of the European sovereign bonds market. Agents make use of different information from the CDS market and the historical price movements of the sovereign bonds for their trading decisions. Subject to the perceived risk, agents exhibit changing trading behaviors in high risk periods and tranquil times. As a robustness check for the ability of our model to identify crises periods we also run a generalized sup adf test as suggested in Phillips, Shi, and Yu (2015) . Our results indicate that the smooth transition regression framework may provide additional valuable information regarding the timing of crisis events

A Multistage Stochastic Programming Approach to the Dynamic and Stochastic VRPTW - Extended version

We consider a dynamic vehicle routing problem with time windows and stochastic customers (DS-VRPTW), such that customers may request for services as vehicles have already started their tours. To solve this problem, the goal is to provide a decision rule for choosing, at each time step, the next action to perform in light of known requests and probabilistic knowledge on requests likelihood. We introduce a new decision rule, called Global Stochastic Assessment (GSA) rule for the DS-VRPTW, and we compare it with existing decision rules, such as MSA. In particular, we show that GSA fully integrates nonanticipativity constraints so that it leads to better decisions in our stochastic context. We describe a new heuristic approach for efficiently approximating our GSA rule. We introduce a new waiting strategy. Experiments on dynamic and stochastic benchmarks, which include instances of different degrees of dynamism, show that not only our approach is competitive with state-of-the-art methods, but also enables to compute meaningful offline solutions to fully dynamic problems where absolutely no a priori customer request is provided.Comment: Extended version of the same-name study submitted for publication in conference CPAIOR201

Exuberance in the U.K. Regional Housing Markets

We combine the estimation of a structural model with inference based on recently developed recursive unit root tests to analyse the behaviour of regional real estate markets in the U.K. over the last four decades. We find two episodes, the late 1980s and the early and mid-2000s, when all regional house prices experienced explosive dynamics above and beyond factors such as housing supply relative to demographics, income, regional spillovers and credit availability. This is the first econometric analysis to provide evidence that would endorse the view that ‘bubbles’, with a particular spatial pattern, are a feature of UK regional housing markets

Episodes of exuberance in housing markets:in search of the smoking gun

After a prolonged period characterized by rapid real appreciation in house prices, there is now broad recognition of the severe correction in housing markets that followed as one of the causes of the 2008-09 global recession. We investigate the time series characteristics of three relevant price indicators of the housing market --real house prices, price-to-income, and price-to-rent ratios-- for the U.S. and 21 other countries during the period 1975Q1-2013Q2 (see Mack and Martínez-García (2011)) for evidence of explosive behavior as a plausible explanation for the boom and bust. The empirical detection of explosive behavior in house prices provides a precise timeline as well as empirical content to the narrative connecting the evolution of housing markets to the global recession; our rich cross-country dataset offers a novel international perspective. For testing and detection, we adopt a pair of novel techniques based on a right-tail variation of the standard Augmented Dickey-Fuller (ADF) test --the supremum ADF (SADF) (Phillips et al. (2011)) and the generalized SADF (GSADF) (Phillips et al. (2012) and Phillips et al. (2013))-- where the alternative hypothesis is of a mildly explosive process (even periodically collapsing with the GSADF test) behavior within sample. Statistically significant periods of exuberance are found in most countries, with our empirical estimates suggesting an unprecedented synchronization across countries preceding the global recession. The boom in housing begins during the late 90s in the U.S. spreading to most countries by the early 2000s, until it bursts for most during 2007-08 as the impact on economic activity was being felt. In this regard, our findings corroborate the narrative of the 2008-09 global recession. In this paper, we also discuss more generally the use of these procedures to monitor international housing markets and as a warning signal

What Proportion of Time is a particular Market inefficient?...Analysing market efficiency when equity prices follow Threshold Autoregressions.

We assume that log equity prices follow multi-state threshold autoregressions and generalize existing results for threshold autoregressive models, presented in Knight and Satchell (2012) for the existence of a stationary process and the conditions necessary for the existence of a mean and a variance; we also present formulae for these moments. Using a simulation study we explore what these results entail with respect to the impact they can have on tests for detecting bubbles or market efficiency. We find that bubbles are easier to detect in processes where a stationary distribution does not exist. Furthermore, we explore how threshold autoregressive models with i.i.d trigger variables may enable us to identify how often asset markets are inefficient. We find, unsurprisingly, that the fraction of time spent in an efficient state depends upon the full specification of the model; the notion of how efficient a market is, in this context at least, a model-dependent concept. However, our methodology allows us to compare efficiency across different asset markets

Renewed Momentum in the German Housing Market: Boom or Bubble?

The renewed momentum in the German housing market has led to concerns that Germany is vulnerable to asset price shocks. In this paper, we apply recently developed recursive unit root tests to detect the beginning and the end of potential speculative bubbles in Germany over the sample period 1987Q3 - 2012Q4. Overall, we find that actual house prices are not significantly disconnected from underlying economic fundamentals. Thus, there is no evidence of speculative house price bubbles in Germany