Determination of periodically collapsing rational bubbles

Since Evans' criticism of conventional unit root and cointegration tests in case ofperiodically collapsing rational bubbles, a number of new approaches have beensuggested. In this paper, we propose a new testing strategy to overcome thedetection problem of periodically collapsing rational bubbles. Our method is basedon Threshold Autoregressive Stochastic Unit Root Models. Monte Carlo simulationsshow that the proposed testing strategy is successful at the detection of bubblesintroduced in Evans (1991). Besides having detection power, we are able to estimatethreshold level and probability of collapse of bubbles. The empirical findings for USstock price in the 1871-2004 period are in favor of existence of bubbles.Keywords: Rational Bubbles, Stochastic Unit Root Models