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DATING THE TIMELINE OF FINANCIAL BUBBLES DURING THE SUBPRIME CRISIS By Peter C B Phillips and Jun Yu September 2010 COWLES FOUNDATION DISCUSSION PAPER NO 1770 COWLES FOUNDATION FOR RESEARCH IN ECONOMICS YALE UNIVERSITY Box 208281 New Haven Connecticut 06520 8281 http cowles econ yale edu Dating the Timeline of Financial Bubbles During the Subprime Crisis1 Peter C B Phillips Yale University University of Auckland University of Southampton Singapore Management University Jun Yu Singapore Management University August 31 2010 1 Phillips acknowledges support from the NSF under Grant No SES 06 47086 Yu acknowledges support from the Singapore Ministry of Education AcRF Tier 2 fund under Grant No T206B4301RS Peter C B Phillips Cowles Foundation for Research in Economics Yale University Box 208281 Yale Station New Haven Connecticut 06520 8281 Email peter phillips yale edu Jun Yu School of Economics and Sim Kee Boon Institute for Financial Economics Singapore Management University 90 Stamford Road Singapore 178903 Email yujun smu edu sg Abstract A new recursive regression methodology is introduced to analyze the bubble characteristics of various nancial time series during the subprime crisis The methods modify a technique proposed in Phillips Wu and Yu 2010 and provide a technology for identifying bubble behavior and consistent dating of their origination and collapse The tests also serve as an early warning diagnostic of bubble activity Seven relevant nancial series are investigated including three nancial assets the Nasdaq index home price index and asset backed commercial paper two commodities the crude oil price and platinum price one bond rate Baa and one exchange rate Pound USD Statistically signi cant bubble characteristics are found in all of these series The empirical estimates of the origination and collapse dates suggest an interesting migration mechanism among the nancial variables a bubble rst emerged in the equity market during mid 1995 lasting to the end of 2000 followed by a bubble in the real estate market between January 2001 and July 2007 and in the mortgage market between November 2005 and August 2007 After the subprime crisis erupted the phenomenon migrated selectively into the commodity market and the foreign exchange market creating bubbles which subsequently burst at the end of 2008 just as the e ects on the real economy and economic growth became manifest Our empirical estimates of the origination and collapse dates match well with the general datetimes of this crisis put forward in a recent study by Caballero Farhi and Gourinchas 2008 Keywords Financial bubbles Crashes Date stamping Explosive behavior Mildly explosive process Subprime crisis Timeline JEL classi cation C15 G12 There is a very real danger fellow citizens that the Icelandic economy in the worst case could be sucked into the whirlpool and the result could be national bankruptcy Prime Minister Geir Haarde televised address to Icelandic Nation October 8 2008 Between 40

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