Unit root methods can help detect financial bubbles, Finnish paper argues
Researchers apply tool to data from 15 European countries
Unit root methods in statistics can provide regulators with a useful warning of financial price bubbles, a working paper published by the Bank of Finland argues.
In Use of Unit Root Methods in Early Warning of Financial Crises, Timo Virtanen, Eero Tölö, Matti Virén and Katja Taipalus use data from from 15 European Union countries between 1980 and 2014. The basic idea behind the method, the authors say, is that "fundamental changes in the autocorrelation structure of relevant time series" imply a
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