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Testing for explosiveness in financial asset prices using high-frequency volatility

Uses jump-robust high-frequency volatility to build a more powerful test for explosive bubbles, with real-time date-stamping.

Bubble testing
working paper
code
With Boswijk, H. P. and Yu, J. Working paper.
Published

June 2, 2025

Abstract

Based on a continuous-time stochastic volatility model with linear drift and jumps, we develop a test for explosive behavior in financial asset prices at a low frequency when prices are sampled at a higher frequency. The test exploits the volatility information in the high-frequency data, while maintaining robustness to jumps using truncation. The method involves first removing jumps and then devolatizing low-frequency logarithmic asset price increments using truncated realized volatility measures. Subsequently, a supremum-type recursive Dickey-Fuller test is performed on the reconstructed sample. The proposed test has a nuisance-parameter-free asymptotic null distribution and is easy to implement. We study the size and power properties of the test in Monte Carlo simulations. A real-time date-stamping strategy based on the reconstructed sample is proposed for the origination date of the explosive regime. Conditions under which the real-time date-stamping strategy is consistent are established. The test and the date-stamping strategy are used to study explosive behavior in recent major cryptocurrency markets and in the S&P 500 index during the 1990s dotcom bubble period.

BibTeX

@unpublished{boswijk2026testing,
  title         = {Testing for explosiveness in financial asset prices using high-frequency volatility},
  author        = {Boswijk, H. Peter and Yu, Jun and Zu, Yang},
  year          = {2026},
  note          = {Working paper},
  eprint        = {2405.02087},
  archivePrefix = {arXiv},
  primaryClass  = {econ.EM}
}