Are stock market crashes and rallies related to deviations from the apparent fundamental share price? Using a switching-regression framework, the authors test whether apparent deviations help to predict the regime from which the next period's stock market return is drawn and the magnitude of...

This paper uses regime-switching econometrics to study stock market crashes and to explore the ability of two very different economic explanations to account for historical crashes. The first explanation is based on historical accounts of quot;manias and panics.quot; Its key features are that...

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...

An extension of Hamilton's Markov switching techniques (Hamilton, J. B., 1989, A new approach to the economic analysis of nonstationary time series and the business cycle, Econometrica, 57, 357-84) is used to describe and analyse stock market returns. Using new tests, very strong evidence is...