A three-regime model of speculative behaviour: modelling the evolution of the S&P 500 composite index
Brooks, C. and Katsaris, A. (2005) A three-regime model of speculative behaviour: modelling the evolution of the S&P 500 composite index. The Economic Journal, 115 (505). pp. 767-797. ISSN 1468-0297
To link to this article DOI: 10.1111/j.1468-0297.2005.01019.x
We examine whether a three-regime model that allows for dormant, explosive and collapsing speculative behaviour can explain the dynamics of the S&P 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.