Detecting periodically collapsing bubbles: a Markov-switching unit root test

This paper addresses the problem of testing for the presence of a stochastic bubble in a time series in the case that the bubble is periodically collapsing so that the asset price keeps returning to the level implied by the market fundamentals. As this is essentially a problem of identifying the collapsing periods from the expanding ones, we propose using a generalization of the Dickey–Fuller test procedure which makes use of the class of Markov regime‐switching models. The potential of the new methodology is illustrated via simulation, and an empirical example is given