RATIONAL BUBBLES IN ISTANBUL STOCK EXCHANGE: LINEAR AND NONLINEAR UNIT ROOT TESTS

Abstract

We analyzed the presence of rational bubbles in Istanbul Stock Exchange (ISE) between 1998-2006 period by implementing linear and nonlinear unit root tests to 7 different indices. The first analysis is based oil implementing augmented Dickey-Fuller unit root and KPSS stationary tests to the price-dividend ratios of the indices. The results are in favor of the presence of rational bubbles in the indices. We implemented a further test which enables time-varying discount rates. Generally the results of the loglinear model also support the previous results. The potential weaknesses of linear test methods as well as the advantages of nonlinear models motivated to use the bilinear test method. The evidence from the nonlinear test is in favor of the existence of rational bubbles in all indices in the sample period of 2(nd) March 1998-29(th) December 2006. But the results of the sub periods are contradictory for some indices. In the first and second sub periods we cannot accept unit root bilinearity for ISE National-Services index. The results also reject the significance of the bilinear term for ISE National-Industrials and ISE Investment Trusts indices in the second subperiod. As a result, we can conclude that as a general structure, the rational bubbles present in ISE.