A Heterogenous Agent Foundation for Tests of Asset Price Bubbles

We provide heterogenous agent foundations for regime-switching tests of asset price bubbles, and illustrate by applying the models to historical U.S. stock market data. While the tests remain unchanged, we show the specification of regimes can be based on the beliefs of investors that come from an underlying heterogenous agent model. This allows consideration of alternative specifications for investor beliefs, straightforward interpretation of extensions to more than three regimes, and added exibility in determining the evolution of beliefs. Our empirical example shows that this can lead to results which differ from traditional regime-switching models.