Abstract
In this study, we revisit the issue as to the presence of rational bubbles in the US stock market during the 1871 to 2002 period using both the Johansen cointegration and the Bierens Citation1997 nonparametric cointegration tests. The results from the conventional Johansen cointegration test fully support the existence of rational bubbles, whereas those from the Bierens nonparametric cointegration test attest to the absence of rational bubbles. On account of the superiority of the nonparametric method to detect cointegration when the error–correction mechanism is nonlinear, we firmly believe that the results from the nonparametric cointegration test are considerably more reliable than those derived from the conventional Johansen approach.
Acknowledgement
The authors are grateful to Prof. H. J. Bierens who kindly provided the EasyReg program.
Notes
1 The detailed procedures are not presented here due to space constraints, but are available upon request.