Dramatic fluctuations in the stock market raise questions about whether actual prices correspond to fundamentals. Even if there are "bubbles", they may not distort real behaviour if managers base investment decisions on fundamentals. Using a new specification testing strategy based on combining...

In this paper, we use an extension of Hamilton's (1989) Markov switching techniques to describe and analyze stock market returns. Using new tests, we find very strong evidence of switching behaviour. A major innovation of our work is to use a multivariate specification which allows us to examine...

This paper tests between fads and bubbles using a new empirical strategy (based on switching regression econometrics) for distinguishing between competing asset pricing models. By extending the Blanchard and Watson (1982) model, we show how stochastic bubbles can lead to regime switching in...

Empirically, sales are I(1). Starting from this fact, we derive three startling results. First, the variance of production is equal to the variance of sales in the long run. Second, this result holds regardless of the strength of production smoothing, stockout avoidance, or cost shocks. Third,...

This paper explores two very different models which might account for stock market crashes. A key innovative feature of our paper is that we use the models to show how their implications for stock market crashes may be tested using switching-regression econometrics. We are careful to show that...