A three-regime model of speculative behaviour: modelling the evolution of the SP 500 composite index

Chris Brooks, Apostolos Katsaris

Research output: Contribution to journalArticle (Academic Journal)peer-review

60 Citations (Scopus)

Abstract

We examine whether a three-regime model that allows for dormant, explosive and collapsing speculative behaviour can explain the dynamics of the SP 500. We extend existing models of speculative behaviour by including a third regime that allows a bubble to grow at a steady rate, and propose abnormal volume as an indicator of the probable time of bubble collapse. We also examine the financial usefulness of the three-regime model by studying a trading rule formed using inferences from it, whose use leads to higher Sharpe ratios and end of period wealth than from employing existing models or a buy-and-hold strategy.
Original languageEnglish
Pages (from-to)767-797
Number of pages31
JournalEconomic Journal
Volume115
Issue number505
DOIs
Publication statusPublished - 1 Jul 2005

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