Testing for a rational bubble under long memory
- Author
- Michael Frömmel (UGent) and Robinson Kruse
- Organization
- Abstract
- We analyze 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 recently proposed test by Sibbertsen and Kruse (2009). An application of the unit root test against long memory by Demetrescu et al. (2008) suggests that the pre-break data can be characterized by long memory, while the post-break sample contains a unit root. These results reconcile two empirical findings which were seen as contradictory so far: on the one hand they confirm the existence of fractional integration in the S&P500 log dividend-price ratio and on the other hand 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.
- Keywords
- dividend-price ratio, changing persistence, Rational bubbles, fractional integration
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Citation
Please use this url to cite or link to this publication: http://hdl.handle.net/1854/LU-1265907
- MLA
- Frömmel, Michael, and Robinson Kruse. “Testing for a Rational Bubble under Long Memory.” Faculteit Economie En Bedrijfskunde : Working Papers, vol. 2011, no. 722, Universiteit Gent, Faculteit Economie en Bedrijfskunde, 2011.
- APA
- Frömmel, M., & Kruse, R. (2011). Testing for a rational bubble under long memory. Ghent, Belgium: Universiteit Gent, Faculteit Economie en Bedrijfskunde.
- Chicago author-date
- Frömmel, Michael, and Robinson Kruse. 2011. “Testing for a Rational Bubble under Long Memory.” Faculteit Economie En Bedrijfskunde : Working Papers. Ghent, Belgium: Universiteit Gent, Faculteit Economie en Bedrijfskunde.
- Chicago author-date (all authors)
- Frömmel, Michael, and Robinson Kruse. 2011. “Testing for a Rational Bubble under Long Memory.” Faculteit Economie En Bedrijfskunde : Working Papers. Ghent, Belgium: Universiteit Gent, Faculteit Economie en Bedrijfskunde.
- Vancouver
- 1.Frömmel M, Kruse R. Testing for a rational bubble under long memory. Vol. 2011, Faculteit economie en bedrijfskunde : working papers. Ghent, Belgium: Universiteit Gent, Faculteit Economie en Bedrijfskunde; 2011.
- IEEE
- [1]M. Frömmel and R. Kruse, “Testing for a rational bubble under long memory,” Faculteit economie en bedrijfskunde : working papers, vol. 2011, no. 722. Universiteit Gent, Faculteit Economie en Bedrijfskunde, Ghent, Belgium, 2011.
@misc{1265907,
abstract = {{We analyze 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 recently proposed test by Sibbertsen and Kruse (2009). An application of the unit root test against long memory by Demetrescu et al. (2008) suggests that the pre-break data can be characterized by long memory, while the post-break sample contains a unit root. These results reconcile two empirical findings which were seen as contradictory so far: on the one hand they confirm the existence of fractional integration in the S&P500 log dividend-price ratio and on the other hand 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 = {{Frömmel, Michael and Kruse, Robinson}},
keywords = {{dividend-price ratio,changing persistence,Rational bubbles,fractional integration}},
language = {{eng}},
number = {{722}},
pages = {{26}},
publisher = {{Universiteit Gent, Faculteit Economie en Bedrijfskunde}},
series = {{Faculteit economie en bedrijfskunde : working papers}},
title = {{Testing for a rational bubble under long memory}},
volume = {{2011}},
year = {{2011}},
}