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Chris Brooks, Apostolos Katsaris, A Three‐Regime Model of Speculative Behaviour: Modelling the Evolution of the S&P 500 Composite Index, The Economic Journal, Volume 115, Issue 505, July 2005, Pages 767–797, https://doi.org/10.1111/j.1468-0297.2005.01019.x
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Abstract
We examine whether a three‐regime model that allows for dormant, explosive and collapsing speculative behaviour can explain the dynamics of the S&P 500. We extend existing models of speculative behaviour by including a third regime that allows a bubble to grow at a steady rate, and propose abnormal volume as an indicator of the probable time of bubble collapse. We also examine the financial usefulness of the three‐regime model by studying a trading rule formed using inferences from it, whose use leads to higher Sharpe ratios and end of period wealth than from employing existing models or a buy‐and‐hold strategy.