Comparing Financial Bubbles in Developed and Emerging Markets: A PSY Model Approach

Abstract

Purpose: This study aims to detect the existence and compare the characteristics (frequency and duration) of financial bubbles between developed markets (the U.S., Japan) and emerging markets (China, Vietnam), thereby examining the limits to arbitrage hypothesis.
Design/methodology/approach: The authors employ the Phillips-Shi-Yu (PSY) test to identify explosive price behaviors in monthly stock index data from January 2002 to February 2025. This method is effective in detecting multiple bubbles and accurately determining their origination and termination dates.
Findings: Empirical results confirm the existence of financial bubbles across all four markets. However, there is a distinct divergence in their characteristics. In developed markets, bubbles are typically short-lived due to effective corrective pressure from institutional investors and short-selling mechanisms. Conversely, in emerging markets, bubbles tend to be more prolonged due to speculative sentiment and the lack of countervailing mechanisms.
Originality/value: The study provides empirical evidence through a direct comparison of the two market groups under a unified timeframe and methodology. Furthermore, it clarifies the role of market microstructure (such as short selling) in controlling asset bubbles.