COWLES FOUNDATION FOR RESEARCH IN
ECONOMICS Box 208281
COWLES FOUNDATION DISCUSSION PAPER NO. 1770 Dating the Timeline of Financial Bubbles during the subprime Crisis Peter C. B. Phillips and Jun Yu September 2010 A new recursive regression methodology is introduced to analyze the
bubble characteristics of various financial time series during the subprime crisis. The
methods modify a technique proposed in Phillips, Wu and Yu (2010) and provide a technology
for identifying bubble behavior and consistent dating of their origination and collapse.
The tests also serve as an early warning diagnostic of bubble activity. Seven relevant
financial series are investigated, including three financial assets (the Nasdaq index,
home price index and asset-backed commercial paper), two commodities (the crude oil price
and platinum price), one bond rate (Baa), and one exchange rate (Pound/USD). Statistically
significant bubble characteristics are found in all of these series. The empirical
estimates of the origination and collapse dates suggest an interesting migration mechanism
among the financial variables: a bubble first emerged in the equity market during mid-1995
lasting to the end of 2000, followed by a bubble in the real estate market between January
2001 and July 2007 and in the mortgage market between November 2005 and August 2007. After
the subprime crisis erupted, the phenomenon migrated selectively into the commodity market
and the foreign exchange market, creating bubbles which subsequently burst at the end of
2008, just as the effects on the real economy and economic growth became manifest. Our
empirical estimates of the origination and collapse dates match well with the general
datetimes of this crisis put forward in a recent study by Caballero, Farhi and Gourinchas
(2008). |
