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Extracting stock-market bubbles from dividend futures

Author

Listed:
  • Nicole Branger
  • Mark Trede
  • Bernd Wilfling
Abstract
This study presents a method for decomposing the EuroStoxx50 index into its unobservable bubble and its fundamental component. Based on a unique data set containing the prices of dividend futures from 2011 to 2023, we determine the fundamental value by extrapolating the price curve of dividend claims for long maturities. As a residual, we obtain the trajectory of the bubble. We find that the bubble component averages around 22% of the EuroStoxx50 index in normal times. The bubble is highly sensitive to increasing geopolitical risks and economic uncertainty triggered by the invasion of Ukraine and the COVID19 outbreak. Our econometric analysis indicates that the fitted bubble process is consistent with rational expectations.

Suggested Citation

  • Nicole Branger & Mark Trede & Bernd Wilfling, 2024. "Extracting stock-market bubbles from dividend futures," CQE Working Papers 10724, Center for Quantitative Economics (CQE), University of Muenster.
  • Handle: RePEc:cqe:wpaper:10724
    as

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    File URL: https://www.wiwi.uni-muenster.de/cqe/sites/cqe/files/CQE_Paper/cqe_wp_107_2024.pdf
    File Function: Version of August 2024
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Rational bubbles; Present-value model; Dividend futures; Equity yields; Explosive behavior;
    All these keywords.

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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