Non-linear Speculative Bubbles in the Pakistani Stock Market

Ehsan Ahmed, J. Barkley Rosser Jr.

Abstract


Since 1987 many stock markeIs of the world have experienced
volatility. This bas been true of many emerging stock markeIs. Our study
of daily stock lIllI1'ket data from Pakistan between June 1987 and May
1993 finds the results to be consistent with the impression of great
volatility and unpredictability thought to be common in such emerging
markets. We used the VAR technique to estimaIe a "presumed" fundamental
on stock indices using lagged first differences of natural logs of daily
exchange rates and stock indices. We used the Hamilton switching model
and associated Walk test to see if such speculative trends were present.
We were significantly unable to rule them out. We then tested for ARCH
effects, whose presence we failed to Ieject. We then used ARCHgenerated
residuals to apply the BDS test of general non-linear structure. We
failed to reject the lack of such non-linear structure quite
significantly. Thus, the Pakistani stock market during the period of
study seems to have exhibited quite complex dynamics, along with
apparendy strong trends that may indicate the presence of speculative
bubbles. This bas many important implications for Pakistani as well as
other emerging markets.

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DOI: https://doi.org/10.30541/v34i1pp.25-41

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