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Fundamental and bubble spillovers in stock markets: a common trend approach

Author

Listed:
  • K. Hafsal

    (Sadakathullah Appa College)

  • S. Raja Sethu Durai

    (University of Hyderabad)

Abstract

This study uses a common trend method of Warne (A common trends model: Identification, estimation and inference, 1993) to identify fundamental and bubble components of stock prices for India, the USA, and Japan. The identified fundamental and bubble components of these stock markets are further evaluated with the Diebold and Yilmaz (Int J Forecast 28:57–66, 2012) return and volatility spillovers along with the wavelet coherency analysis to find out the origin and their relationship in a frequency–time domain. The empirical results from the monthly data for the period April 1994 to July 2018 indicate that during the global financial crisis of 2007–2009, all these stock markets are invariably driven by the bubbles of different sizes. The results from the return and volatility spillover across these stock markets indicate that the major part of the spillover is coming from the fundamentals than the bubble components. Further, the results from the wavelet coherency analysis also show that the fundamental components have consistent longer horizon coherency, while there is none among the bubble components. These results imply that the bubble components of these markets are purely transitory and have no impact across them, so focusing on fundamentals is a better strategy for longer horizon investments.

Suggested Citation

  • K. Hafsal & S. Raja Sethu Durai, 2023. "Fundamental and bubble spillovers in stock markets: a common trend approach," SN Business & Economics, Springer, vol. 3(3), pages 1-17, March.
    • Handle: RePEc:spr:snbeco:v:3:y:2023:i:3:d:10.1007_s43546-023-00437-0
    DOI: 10.1007/s43546-023-00437-0
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    References listed on IDEAS

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    More about this item

    Keywords

    Fundamental and bubbles; Return and volatility spillover; Common trend method; Wavelet coherence;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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