Abstract:
In this study I propose a model for the behaviour of the real stock market prices which allows for the existence of speculative bubbles. The bubble is assumed to follow a Markov-switching process with explosive and collapsing regimes. Inference on the model is performed by using observations on the deviations of the log prices from fundamentals. The fundamental prices are assumed to be a function of the discounted future dividends. Data used for estimation includes major stock market indices: SP 500, NASDAQ, Euro Stoxx 50 and major US companies.
