A Three-Regime Model of Speculative Behaviour: Modelling the Evolution of the S&P 500 Composite Index
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. Copyright 2005 Royal Economic Society.
Year of publication: |
2005
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Authors: | Brooks, Chris ; Katsaris, Apostolos |
Published in: |
Economic Journal. - Royal Economic Society - RES, ISSN 1468-0297. - Vol. 115.2005, 505, p. 767-797
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Publisher: |
Royal Economic Society - RES |
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