Testing for Multiple Bubbles in Iranian Foreign Exchange Market:The Application of RTADF Unit Root Tests

Rasekhi, Saeed; Elmi, Zahra Mila; Shahrazi, Milad

doi:10.29252/jemr.7.27.7

Volume 8, Issue 27 (3-2017) jemr 2017, 8(27): 7-39 | Back to browse issues page

‎ 10.29252/jemr.7.27.7

‎ 20.1001.1.22286454.1396.7.27.3.5

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Rasekhi S, Elmi Z M, Shahrazi M. Testing for Multiple Bubbles in Iranian Foreign Exchange Market:The Application of RTADF Unit Root Tests. jemr 2017; 8 (27) :7-39
URL: http://jemr.khu.ac.ir/article-1-1118-en.html

Testing for Multiple Bubbles in Iranian Foreign Exchange Market:The Application of RTADF Unit Root Tests

Saeed Rasekhi ^*

¹, Zahra Mila Elmi²

, Milad Shahrazi²

1- University of Mazandaran , srasekhi@umz.ac.ir
2- University of Mazandaran

Abstract: (7818 Views)

The bubble of Asset Price is the deviation of the asset price from its fundamental value. Since the many of the financial crisis arise from bursting bubble of financial assets, the explore of bubble behaviors in these markets and the early detection for the prevention of adverse economic consequences is important. Considering the criticisms of conventional tests for detecting price bubbles and also the importance of the subject, in this study, we have considered the new methods proposed by Phillips, et al. (2011, 2012) based on Right-Tailed Augmented Dickey-Fuller (RTADF) tests. In this regard, in order to testing explosive behavior and multiple bubbles and determining bubble periods in Iranian informal exchange market, we have applied the tests of SADF and GSADF according to monthly data for the nominal exchange rate from 2002:04 to 2016:03. Since the explosive behavior in nominal exchange rate might be driven by the its fundamentals, to comment on the existence of rational bubbles in the exchange market, we have evaluated the ratio of the nominal exchange rate to the relative prices of tradable and non-tradable goods. Based on the obtained results, the Iranian foreign exchange market has been experienced explosive behavior and multiple bubbles in the period of under study. Moreover, the relative prices of traded goods explain some explosiveness in the Iranian exchange market. Our ﬁndings suggest that the explosive behavior in nominal exchange rate from 2008:10-2008:12, 2012:01-2012:03 and 2013:09-2013:11 was because of rational bubbles in exchange rate and in other periods was driven by the relative price of tradable goods. Therefore, it is suggested to control the sharp exchange rate movements, in addition to bubbles, fluctuations in prices of traded goods market require more attention. Also, due to the possibility of bubbles repetition, the GSADF test is the better test to detect bubbles.

Keywords: Multiple Bubbles, Informal Exchange rate, RTADF Unit Root Tests, The Relative Prices of Tradable and Non-tradable Goods, Iran

Full-Text [PDF 2683 kb] (2991 Downloads)

Type of Study: Applicable | Subject: تجارت و مالیه بین الملل
Received: 2015/10/4 | Accepted: 2017/01/24 | Published: 2017/05/17

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