An Empirical Investigation of Rational Speculative Bubbles in the Jordanian Stock Market: A Nonparametric Approach by ProQuest

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This paper examines the presence of rational speculative bubbles in the Jordanian equity market (Amman Stock Exchange, ASE) over a sample period from January 1992 to May 2007 by means of a methodology based on a non-parametric duration dependence test. The results show evidence of negative duration dependence in runs of positive returns, a characteristic consistent with the presence of rational speculative bubbles. [PUBLICATION ABSTRACT]

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									International Management Review                                                     Vol. 5 No. 2 2009

       An Empirical Investigation of Rational Speculative Bubbles in the
           Jordanian Stock Market: A Nonparametric Approach
                                       Mahmoud Ali Jaradat
              Department of Banking & Finance, AL al-BAYT University, Mafraq, Jordan

[Abstract] This paper examines the presence of rational speculative bubbles in the Jordanian equity
market (Amman Stock Exchange, ASE) over a sample period from January 1992 to May 2007 by
means of a methodology based on a non-parametric duration dependence test. The results show
evidence of negative duration dependence in runs of positive returns, a characteristic consistent with
the presence of rational speculative bubbles.
[Keywords] Rational bubbles; duration dependence; ASE; Jordan; JEL classification; G14; G15

                                             Introduction
As of December 2006, the market capitalization of the Jordanian stock market (Amman Stock
Exchange, ASE) was about $29.73 billion, making it one of the fastest-growing equity market in the in
the Middle East and North Africa. In less than a decade, the market capitalization of ASE increased by
more than 470%, from $5 billion in 1996. The significant growth of the ASE is a reflection of its
attractiveness to both domestic and international investors. The ASE, however, has been interrupted by
noticeable bouts of market booms and busts. For example, between 2002 and its peak at the end of
2005, the ASE index rose from a level of 1760.37 to 8191.5 only to collapse abruptly to 5518.1 at the
end of 2006. These have prompted some market participants to conjecture that the ASE stock prices
are driven by excessive speculation (rational bubbles) rather than the market fundamentals.
      Rational speculative bubbles refer to a state in which the price of an asset is based on something
other than the market’s evaluation of the asset's real value (DeMarzo, et al., 2007). Assert that prices
can be driven higher when a few uninformed traders cause an asset price to rise above its fundamental
value. Other traders buy the asset with the assumption that the price will rise, and they can sell it
before the price drops. This drives the price away from its fundamental value. The result is a short-run
bubble, which ultimately ruptures when the price returns to its fundamental value (Kirman & Teyssiere,
2005; Dass, et al., 2007).
      Accordingly, in this study, we examine whether equity prices in the ASE were characterized by
rational speculative bubbles over the sample period from January 1992 to May 2007. This subject is
vital because the detection of rational speculative bubbles can very useful for investors and policy-
making decisions. From the investors’ point of view, it will make them aware of the size of bubbles
that can assist them to detect early signals on the possibility of stock price crash (Brooks & Katsaris,
2005). For the policy-makers, deducing the existence and size of rational bubbles provides several
implications to them about how to protect the stock market through manipulating policies that
minimize speculative bubbles in the market.
      As a speculative bubble is defined as a different between fundamentals determined and observed
prices, the main issue is to test the stabl
								
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