Do Bubbles Spill Over?

Abstract

We document the existence of rational bubbles in emerging markets by employing a structural state space model. The high correlation of stock price indices among a relatively large number of emerging markets indicates rational bubbles might spill over. We employ a newly developed Unscented Kalman Filtering technique to estimate the rational bubbles in stock markets. The bubbles mentioned here are assumed to be stochastic and feature time-variable parameters. Most of the variations of the stock prices which include rational bubbles in various sizes are captured by the model.