Speculative Bubble And IPO Underpricing

Following Phillips,Wu and Yu(2007),this paper modifies and improves their bubble detecting method.Two alternative bubble detecting methods, the forward recursive ADF tests raised by Phillips et al.(2007) and the modified version in this paper,forward rolling ADF tests,are implemented and compared.Empirical results based on Chinese A-Share stock market demonstrate that only rolling ADF tests are successful in detecting rational bubbles by overcoming the problem of periodically collapsing bubble.As we have expected,econometrical evidence for bubbles in Chinese A-Share stock market are detected.At last,the potential time when bubble begins to collapse is investigated.After we successfully located the period of bubble,significantly and positively correlated relationship between IPO underpricing and the existence of bubble is found using the data after 2004.This finding provides empirical evidence for the theory of bubble and IPO underpricing for the first time.The existence of bubble does a lot of harm to the financial market. In this paper,the stock market collapse rapidly at last and the IPO underpricing is aggravated during the bubble period.Hence,the inefficiency of the financial market is worsened.This paper provides theoretical and empirical support for the necessity of improvement of the financial regulation in China.