1887

OECD Economics Department Working Papers

Working papers from the Economics Department of the OECD that cover the full range of the Department’s work including the economic situation, policy analysis and projections; fiscal policy, public expenditure and taxation; and structural issues including ageing, growth and productivity, migration, environment, human capital, housing, trade and investment, labour markets, regulatory reform, competition, health, and other issues.

The views expressed in these papers are those of the author(s) and do not necessarily reflect those of the OECD or of the governments of its member countries.

English, French

Can Emerging Asset Price Bubbles be Detected?

Bayesian Model Averaging techniques are used to analyse how robustly it is possible to identify factors that may lead to the bursting of asset price bubbles in OECD economies. A large set of variables put forward in the literature is assessed, as well as interactions of these variables with estimates of asset price misalignments to evaluate the importance of the different channels postulated by theory. The results indicate that asset price misalignments are not robust determinants of house price reversals unless their interaction with other characteristics of the economy (credit growth, population growth and interest rate developments) is taken into account. On the other hand, stock price reversals are affected by misalignments, as well as other real and monetary variables. Out-of-sample prediction exercises provide evidence that dealing explicitly with model uncertainty using Bayesian model averaging techniques leads to better forecasts of reversals in asset prices than relying on model selection. Conclusions regarding the importance of dealing quantitatively with model uncertainty are drawn to improve the anticipation of asset price reversals.

English

Keywords: model averaging, stock prices, house prices, model uncertainty, asset prices
JEL: G12: Financial Economics / General Financial Markets / Asset Pricing; Trading volume; Bond Interest Rates; C11: Mathematical and Quantitative Methods / Econometric and Statistical Methods and Methodology: General / Bayesian Analysis: General; C23: Mathematical and Quantitative Methods / Single Equation Models; Single Variables / Single Equation Models; Single Variables: Panel Data Models; Spatio-temporal Models
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