Are Transient Explosive Roots the Signature of a Bubble? A Markov Regime Switching Approach with Bayesian Model Averaging

We investigate the behaviour of a range of economic time series using a Bayesian Markov Switching model that allows for explosive regimes and alternative levels of error variance with potentially t-distributed errors. Our results, generated by Bayesian Model Averaging, find explosive root regimes only in a minority of data series that have previously been found to contain bubbles, once regime switching error variance is permitted. While we find that many of the series appear to display regime switching that could quite possibly be induced by ‘bubble’ processes we argue that while some bubbles might be explosive, the recent trend towards viewing transient explosive roots as a generic bubble signature is problematic.