Dynamic Analyses for Transmission between Asset Bubble Trends of Accumulated Co‐integration Errors1. (August 2016)

• Record Type: Journal Article
• Authors: Kim, Yun‐Yeong
• Is Part Of: Asia-Pacific journal of financial studies. Volume 45:Number 4(2016:Aug.)
• Page Start: 574
• Page End: 605
• Publication Date: 2016-08
• Subjects: Asset prices -- ACE bubble trends -- Beveridge‐Nelson decomposition -- Dynamic analyses -- Transmission; Pacific Area -- Economic conditions -- Periodicals; Finance -- Asia -- Periodicals; Finance -- Pacific Area -- Periodicals; Asia -- Economic conditions -- Periodicals; 332.09505
• DOI: 10.1111/ajfs.12139
• Languages: English
• ISSNs: 2041-9945

Abstract

Abstract: We analyze how the bubble trends of different asset prices are dynamically transmitted between one another under a co‐integrated VAR model. The vector bubble trends are defined by a random walk trend derived from Beveridge‐Nelson decomposition allowing a co‐integration between multiple asset prices and their fundamentals. This I(1) bubble trend is connected to the no‐arbitrage condition for efficient asset pricing and is composed of Accumulated Cointegration Error (ACE). Under this setup, we may conduct dynamic analyses of the vector ACE bubble trends, which enables us to assess the interrelationships of bubbles of different assets and the dynamic role of bubbles in asset pricing. It may be critical for a preemptive policy reaction to block any possible contagion of an asset price bubble that might be harmful to the economy. Using the monthly data of the U.S. and impulse response analyses, we empirically find that (i) there are ACE bubble trends in both stock and housing prices; (ii) the stock and housing price bubbles are highly correlated with one another; (iii) stock prices are more bubble‐dependent than housing prices; and (iv) the stock bubble affects the housing bubble, but the reverse case does not hold.