We are grateful to three anonymous referees for extensive comments on a previous version of this article. We are also grateful to Phillip Xu, Ryan Davies, David Oakes, Menelaos Karanasos, Karim Abadir, Apostolos Filippopoulos, Sarantis Kalyvitis and seminar participants at the Department of Economics and Related Studies at the University of York, and at the Department of International and European Economic Studies at the Athens University of Economics and Business for useful comments and suggestions. We are responsible for any remaining errors.
A Three-Regime Model of Speculative Behaviour: Modelling the Evolution of the S&P 500 Composite Index*
Article first published online: 13 JUL 2005
The Economic Journal
Volume 115, Issue 505, pages 767–797, July 2005
How to Cite
Brooks, C. and Katsaris, A. (2005), A Three-Regime Model of Speculative Behaviour: Modelling the Evolution of the S&P 500 Composite Index. The Economic Journal, 115: 767–797. doi: 10.1111/j.1468-0297.2005.01019.x
- Issue published online: 13 JUL 2005
- Article first published online: 13 JUL 2005
- Date of receipt of first submission: May 2002 Date of receipt of final typescript: July 2004
We examine whether a three-regime model that allows for dormant, explosive and collapsing speculative behaviour can explain the dynamics of the S&P 500. We extend existing models of speculative behaviour by including a third regime that allows a bubble to grow at a steady rate, and propose abnormal volume as an indicator of the probable time of bubble collapse. We also examine the financial usefulness of the three-regime model by studying a trading rule formed using inferences from it, whose use leads to higher Sharpe ratios and end of period wealth than from employing existing models or a buy-and-hold strategy.