Speculative Rational Bubbles: Asset Prices in GCC Equity Markets

Abstract

Conventional theory of speculative bubbles describes stock bubbles as stock prices that exceed their fundamental value because current owners believe that the stocks can be resold at an even higher price in the future. A speculative bubble driven by rumors and not supported by fundamentals will result in mis-allocation of resources into non-optimal uses. Therefore, identifying and dating speculative explosive bubbles has been a major concern in the economic literature.  This study examines the presence of the phenomenon of stock market bubbles in the GCC countries including Saudi Arabia, Qatar, United Arab Emirates, Oman and Bahrain over 2000 to 2013. Considering rational bubble change stock price from random walk to an explosive regime and traditional unit roots has less power in detecting periodically collapsing bubbles, this study employ newly developed testing approach of right tailed unit root test to not only investigates the presence of rational periodically collapsing bubbles, but also stamps the times of bubbles emergence and collapse. Our empirical results indicate the existence of rational bubbles in GCC stock market. The estimation of the starting date of the bubbles indicates that explosive regime emerges in the early 2000s.