Speculative bubbles in present-value models: A Bayesian Markov-switching state space approach

We estimate the dynamics of a speculative bubble subject to a surviving and a collapsing regime together with the dynamics of dividends and returns in a tractable state space specification of the present-value model. To estimate this new high-dimensional model, we develop an efficient Markov chain Monte Carlo sampler to simulate from the joint posterior distribution. We find that real-world stock price bubbles show significant Markovswitching structure. Further, the results indicate that dividend growth rates are highly predictable. Finally, we find that bubble variation explains a large share of the variation in the price-dividend ratio and unexpected return. (c) 2021 The Authors. Published by Elsevier B.V. This is an open access article under the CC BY license (http://creativecommons.org/licenses/by/4.0/)