Driven by Fundamentals or Exploded by Sentiments: Testing for Speculative Bubbles in Emerging Stock Markets
DOI:
https://doi.org/10.22555/pbr.v25i1.746Keywords:
Speculative Bubbles, Emerging Markets, Rtadf approach, economic and fnancial stabilityAbstract
This study investigates the existence of speculative bubbles in diverse nine emerging markets, which may lead to terrible financial disasters. Therefore, a novel approach of Rtadf (Recursive, Right-tailed Augmented Dickey-Fuller) tests, monthly time-series data (January 2000–July 2021), and Monte-Carlo simulation under Gaussian assumptions is used. Our findings imply that massive growth in China, Indonesia, Malaysia, Pakistan, Taiwan, and Thailand is driven by credit or speculative bubbles rather than fundamentals whereas no bubbles are found in South Korea, India, and the Philippines - (as per Generalized Supreme ADF - GSADF test). Furthermore, in each stock market, these bubbles primarily exist prior to any local and global financial crisis. These findings add to the existing knowledge of the relationship between bubbles and financial crises. Hence, this study suggests the GSADF test could detect an impending financial crisis in any economy, allowing authorities to control or maintain economic and financial stability.References
Almudhaf, F. (2018). Predictability, Price bubbles, and efficiency in the Indonesian stock market. Bulletin of Indonesian Economic Studies, 54(1), 113-124.
Blanchard, O. J. (1979a). Backward and forward solutions for economies with rational expectations. The American Economic Review, 69(2), 114-118.
Blanchard, O. J. (1979b). Speculative bubbles, crashes, and rational expectations. Economics Letters, 3(4), 387- 389.
Blanchard, O. J., & Watson, M. W. (1982). Bubbles, rational expectations, and financial markets. NBER working paper, (w0945).
Bansal, R. & A. Yaron. (2004). Risks for the Long Run: A Potential Resolution of Asset Pricing Puzzles. Journal of Finance, 59 (4), 1481-1509.
Bulwark (2021). Data is retrieved from: https://www.thebulwark.com/get-ready-for-the-emerging-market-bubble-to-burst.
Çagli, E. Ç. & Mandaci , P. E. (2017). Borsa In Istanbul Rational Balloon existence: Sector An Analysis Over Indices, Political Finance & Economic Comments , 54 (629) 63-76.
Campbell, J. Y., & Shiller, R. J. (1988). The dividend-price ratio and expectations of future dividends and discount factors. The Review of Financial Studies, 1(3), 195-228.
Caspi, I. (2014). Rtadf: Testing for Bubbles with E-Views. MPRA Paper No. 58791
Caspi, I. (2017). Rtadf: Testing for bubbles with E-Views. Journal of Statistical Software, 81, 1-16.
Caspi, I., & Graham, M. (2018). Testing for bubbles in stock markets with irregular dividend distribution. Finance Research Letters, 26, 89-94
Chan, K., McQueen, G., & Thorley, S. (1998). Are there rational speculative bubbles in Asian stock markets? Pacific-Basin Finance Journal 6(1-2), 125-151. DOI: https://doi.org/10.1016/S0927-538X(97)00027-9.
Chan, H. L. & Woo, K. Y. (2008). "Testing for stochastic explosive root bubbles in Asian emerging stock markets." Economics Letters. 99(1) 185-188. DOI: http://dx.doi.org/10.1016/j.econlet.2007.06.024.
Chen, S. W., & Xie, Z. (2017). Detecting speculative bubbles under considerations of the sign asymmetry and size non-linearity: New international evidence. International Review of Economics & Finance, 52, 188-209. DOI: 10.1016/j.iref.2017.09.008.
Chang, T., Gil-Alana, L., Aye, G. C., Gupta, R., & Ranjbar, O. (2016). Testing for bubbles in the BRICS stock markets. Journal of Economic Studies.
Cochrane, J. H. (2001). Asset Pricing Princeton University Press: Princeton.
Colombo(2014).Dataretrievefrom:https://www.forbes.com/sites/jessecolombo/2014/01/23/
why-southeast-asias-economy-is-a-giant-bubble-waiting-to-pop/?sh=7af9bc0668d9.
Dawn(2015).Data retrieved from:https://www.dawn.com/news/1154454https://www.dawn.com/news/1340447.
Diba, B. T., and Grossman, H. I. (1988a), the theory of rational bubbles in stock Prices. The Economic Journal, 98, 746-754.
Diba, B. T. and Grossman, H. I. (1988b). Explosive rational bubbles in stock prices? The American Economic Review, 520-530.
Evans, G.W. (1991), Pitfalls in testing for explosive bubbles in asset prices. The American Economic Review, 81, 922– 930.
Gali, J. (2014). Monetary policy and rational asset price bubbles. American Economic Review, 104(3), 721-752. DOI: 10.1257/aer.104.3.721.
Ghosh, B. (2016). Rational Bubble Testing: An In-depth Study on CNX Nifty. Asian Journal of Research in Banking and Finance, 6(6), 10-16.
Glindro, E. T., & Delloro, V. K. (2010). Examining asset price bubbles in the Philippines. BSP Working Paper.
Hall, S. G., Psaradakis , Z., & Sola, M. (1999) Detecting periodically collapsing bubbles A Markov switching unit root test Journal of Applied Econometrics, 14(2), 143-154.
Hu, B. (2011). Are Asian stock markets characterized by rational speculative bubbles? Doctoral dissertation, Lincoln University.
Jiménez, Á. J. (2011). Understanding economic bubbles. Programa Universitat - Empresa.
Joarder, M. A. M., Ahmed, M. U., Haque, T., & Hasanuzzaman, S. (2014). Empirical testing of informational efficiency in Bangladesh capital market. Economic Change and Restructuring, 47(1), 63-87.
Kashif, M., Palwishah, R., Ahmed, R. R., Vveinhardt, J., & Streimikiene, D. (2021). Do investors herd? An examination of Pakistan stock exchange. International Journal of Finance & Economics, 26(2), 2090-2105.
Korkmaz, O., Bari, B., & Adali, Z. (2021). An empirical comparison of stock market bubbles. Business & Management Studies: An International Journal, 9(4), 1286-1299. DOI: https://doi.org/10.15295/bmij.v9i4.1889.
Liaqat, A., Nazir, M. S., & Ahmad, I. (2019). Identification of multiple stock bubbles in an emerging market: application of GSADF approach. Economic Change and Restructuring, 52(3), 301-326.
Li, G., Xiao, M., Yang, X., Guo, Y., & Yang, S. (2021). Research on multiple bubbles in China’s multi-level stock market. PloS one, 16(8), e0255476.
Lee, J. H., & Phillips, P. C. (2016). Asset pricing with financial bubble risk. Journal of Empirical Finance, 38, 590-622.
Liu, Z., Han, D., & Wang, S. (2016). Testing bubbles: exuberance and collapse in the Shanghai A-share stock market. China's New Sources of Economic Growth: Vol. 1: Reform, Resources and Climate Change, 1, 247-270.
Madjumerd, H. M., Zamanian, G., & Shahiki Tash, M. N. (2017). Evaluation of Multiple Bubbles in the Stock Market of Tehran. Quarterly Journal of Quantitative Economics, 14(2), 85-110.
Mitra, A., & Choudhuri, S. (2016) A Study on Rational Price Bubble in S&P Bse Sensex. International Journal of Business Quantitative Economics and Applied Management Research, 3(4), 13-19.
Nazir, M. S., Mahmood, J., Abbas, F., & Liaqat, A. (2019). Do rational bubbles exist in emerging markets of SAARC?Journal of Economic and Administrative Sciences.
Phillips, P. C., & Magdalinos, T. (2007). Limit theory for moderate deviations from a unit root. Journal of Econometrics, 136(1), 115-130.
Phillips, P. C., Wu, Y., & Yu, J. (2011). Explosive behavior in the 1990s HOPE When did exuberance escalate asset values? International economic review, 52(1), 201-226.
Phillips, P. C., Shi, S., & Yu, J. (2015). Testing for multiple bubbles Limit theory of real time detectors. International Economic Review, 56(4), 1079-1134.
Rasekhi, S., Elmi, Z. M., & Shahrazi, M. (2017). Testing for multiple bubbles in Iranian foreign exchange market: The application of RTADF unit root tests. Journal of Economic Modeling Research, 7(27), 7-39.
Shiller, R. J., (1981b). The Use of Volatility Measures in Assessing Market Efficiency, Journal of Finance, 36, 291-304. Data retrieved from: https://ideas.repec.org/a/bla/jfinan/v36y1981i2p291-304.html.
Shleifer, A. (2000). Inefficient Markets: An Introduction to Behavioral Finance, Oxford University Press. Data retrieved from: https://global.oup.com/academic/product/inefficient-markets-9780198292272?cc=pk&lang=en&
Singh, S., Vats, N., Jain, P., & Yadav, S. S. (2018). Rational Bubbles in the Indian Stock Market: Empirical Evidence from the NSE 500 Index. Finance India. XXXII (2), 457—478.
Szulczyk, K., Cheema, M. A., & Holmes, M. (2018). Rational Speculative Bubbles: Evidence from Asian Stock Markets. Available at SSRN 3096400.
Tran, T. B. N. (2017). Speculative bubbles in emerging stock markets and macroeconomic factors: A new empirical evidence for Asia and Latin America. Research in International Business and Finance, 42, 454-467.
Weil, D. (2021). The case for and against investing in emerging markets. The wall street Journal. Data retrieved from: https://www.wsj.com/articles/emerging-markets-investment-11625418130
West, K.D. (1988). Bubbles, Fads, and Stock Price Volatility Tests: A Partial Evaluation. Journal of Finance, 43(3): 639-660
Yao S, Luo D (2009). The economic psychology of stock market bubbles in China. World Economy. 32(5), 667–691
Yu, J. S., & Hassan, M. K. (2010). Rational speculative bubbles in MENA stock markets. Studies in Economics and Finance. 27(3), 247–264
Zeren, F., & Yilanci, V. (2019). Are there multiple bubbles in the stock markets? Further evidence from selected countries. Ekonomika, 98(1), 81-95.
Additional Files
Published
Issue
Section
License
Copyright (c) 2023 Asra Shaikh, Muhammad Kashif , Mobeen Ur Rehman , Shafiq Ur Rehman
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
