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A financial engineering approach to identify stock market bubble

Chen, Guojin; Yan, Cheng

A financial engineering approach to identify stock market bubble Thumbnail


Authors

Guojin Chen

Cheng Yan



Abstract

In this paper we adopt an engineering method based on Al-Anaswah and Wilfling, state space model with Markov-switching, to capture the speculative bubbles of stock markets in China and US. We present the VAR log linear asset pricing model in state space model with Markov-switching, so that we can capture the unobservable speculative bubbles. Based on the dataset from Stock markets in China and US, we find empirically that the engineering technique we choose detect the stock markets bubbles effectively, and that the switching probabilities between the surviving and collapsing regimes. In-the-sample and out-of-sample forecasting further support our empirical evidence.

Citation

Chen, G., & Yan, C. (2011). A financial engineering approach to identify stock market bubble. Systems Engineering Procedia, 2, 153-162. https://doi.org/10.1016/j.sepro.2011.10.018

Journal Article Type Article
Publication Date Dec 16, 2011
Deposit Date Oct 20, 2015
Publicly Available Date Mar 28, 2024
Journal Systems Engineering Procedia
Print ISSN 2211-3819
Publisher Elsevier
Peer Reviewed Peer Reviewed
Volume 2
Pages 153-162
DOI https://doi.org/10.1016/j.sepro.2011.10.018
Keywords Bubble, VAR-loglinear asset pricing, State space model with Markov-switching, Financial engineering.

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