Title: Testing for explosive bubbles in the presence of autocorrelated innovations
Authors: Erik Christian Montes Schutte - Aarhus University (Denmark) [presenting]
Abstract: The aim is to analyze an empirically important issue with recently developed recursive right-tailed unit root tests for bubbles in asset prices. First, we show that serially correlated innovations, which is a feature that is present in most financial series used to test for bubbles, can lead to severe size distortions when using either fixed or automatic (based on information criteria) lag-length selection in the auxiliary regressions underlying the tests. Second, we propose a sieve bootstrap version of these tests and show that this results in more or less perfectly sized test statistics at virtually no cost in power. Finally, we show an empirical application of the bootstrap versions of the tests on the housing markets of OECD countries.