Our paper uses simulation methods to examine the size and power of regime-switching tests for bubbles. We find that even with several hundred observations, the tests show sometimes considerable size distortion. This distortion makes the tests conservative; they understate the significance of the...

Are stock market crashes and rallies related to deviations from the apparent fundamental share price? Using a switching-regression framework, the authors test whether apparent deviations help to predict the regime from which the next period's stock market return is drawn and the magnitude of...