Essays on economic bubbles

Abstract

The aim of this dissertation is to study the bubbles in the economy. There are two separated studies which are 1) “Testing the bubbles and the crashes of the asset prices: The evidence from the southeast Asian countries.” and 2) “Can government bond replace rational bubbles? The empirical investigation on Singapore and Thailand.” combined in this dissertation.

For the long period of time, many economists try to find the detector for the existense and the crashes of the bubble. However, many of econometric models might distinquish the explosive bubbles from the non-stationary series. In the first study, which is presented in chapter two of this dissertation, the new algorithm known as right-tail augmented Dickey-Fuller test is applied for evaluating the asset prices. By this tool, it can stamp the start and the end date of the bubbles episode. In this study, in many asset prices such as stock indices, gold prices, rubber prices, and the real estate within the southeast Asian countries. The results show that these models can detect the bubble episodes as recorded in history such as the Black Monday stock market crash (1987) and the subprime crisis (2007 – 2008) in some countries, but fails to detect the collapse of the stock market during Asian financial crisis (1997). Not only the econometric point of view, but also macroeconomic theories of bubbles are taken into account for the study. There are some variables such as the real interest rate, real GDP, real consumption, real investment, and capital flow that have a relationship with the bubbles. These macroeconomic variables may have the differnt values during the different state of the economy (with bubble and without bubble). The tests of difference in mean have been performed to recheck the performance of the new algorithm. The results show that the algorithm may not catch well Thailand’s data because it fails to reject null hypothesis and the mean of the macroeconomic variables are the same for the different state of the economy. However, the algorithm may work for Indonesia, Philippines, and Singapore because there are the different of the average value of macroeconomic variables for the different bubble status in the economy.

For the second study, which is presented in chapter three of this dissertation, it aims to test the theoretical policy implication on rational bubbles that the government bonds can be replaced the rational bubbles in the asset market. The study is scoped down to the bubbles in the stock markets and selected Singapore and Thailand as a representative for the investigation. We apply the Fourier transformation technique to construct our own bubble index. Then, we utilize this bubble index to find out the relationship with each country's government bonds. We found the empirical support of the theory in the case of Singapore, but not in the case of Thailand. For the case of Singapore, the credibility in an ability to collect tax and the appropriate yield of government bonds are keys to the effectiveness of such the anti-bubble policy. Moreover, we also found that expansionary fiscal policies empirically accelerate the growth of bubbles.