Financialization and Speculative Bubbles - International Evidence

Countries across the globe have undergone financialization of their economies over the
recent decades. Concomitantly, asset markets have exhibited high levels of volatility with
sharp increases characteristic of speculative bubbles followed by even sharper crashes.
This paper attempts to test the possible presence of nonlinear speculative bubbles in 23
international markets using daily data from January 1993-March 2015, and its possible
link to the financialization phenomenon. To estimate fundamental values, we estimate
VAR models for each market for stock market returns with world interest rates, exchange
rates, and world stock indexes as the fundamental variables. Residuals from these VAR
national market models are tested for significant movements away from the
fundamentals using Hamilton regime switching and Hurst rescaled range tests. After
removing ARCH effects from the residuals the remaining series is tested for
nonlinearities using BDS statistics. Our results indicate the presence of speculative
bubbles in all 23 of these markets with increasing incidence over time, which suggest a
linkage with the phenomenon of financialization of the economies over the period.