Analysis of the formation of the price bubble in the financial market: with an emphasis on the price bubble in the insurance industry and the stock market with the Markov-switching approach

Document Type : Research Paper

Authors

1 Assistant Professor, Faculty Member, Allameh Tabataba,i University, Tehran, Iran

2 Associate Professor, Faculty Member, Allameh Tabataba, i University, Tehran, Iran

3 PhD Student in Financial Management, Allameh Tabataba, i University, Tehran, Iran

Abstract

This article investigates the formation of price bubbles in the insurance industry index in the Tehran Stock Exchange with the total price index, considering the importance of the price trend and the formation of bubbles in the stock market in order to get a better understanding of the price trend of the insurance industry compared to the total index of Tehran Stock Exchange. The time period studied in this article is from April 2017 to April 2020. The method used here is the Markov switching method. Also, the basis of this study to identify the price bubble is two-regime state-space model of Wu (1995) and Campbell and Shiller (1988), which considers bubble formation in one state and bubble burst in the other. The results show that the trend of price bubble formation in the insurance industry in Tehran Stock Exchange and the total price index of the stock exchange are different and fluctuations in the insurance industry index have been more than fluctuations in the total stock index. Also, based on the results, the number of bubble formation trends related to the insurance industry index is about 26 times and the total index is 19 times. In addition, the bubbles that occur are less compatible with each other, so that studies show that in the period of 2017 to 2018, the total index did not face the formation of bubbles, but the insurance industry index has experienced about 12 bubble formation processes in the same period

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