Identifying asset pricing bubbles: Testing for explosive behavior in the NASDAQ and STOXX 600 Europe Technology indices

Abstract: A forward recursive estimation method is used to examine stock market data on unit root against explosive behavior as an indication of financial exuberance. Through specific dividend-stock pricing modeling, the recursive implementation of a right-tailed ADF test allows for directly testing the price index series on explosive behavior and its corresponding dividend series on non-explosive behavior. In addition, the forward recursive estimation method enables us to date stamp periodically collapsing bubbles. Empirically applied, we find the dotcom bubble of the late 90's in the EU technology index (STOXX 600 Europe Technology) which is in line with financial exuberance on the NASDAQ. Moreover, both indices demonstrate explosive behavior around the financial crisis in 2008. Lastly, it is found that the model in smaller subsamples is highly sensitive to the initial starting point.