Testing for rational bubbles in banking indices

In this paper a simple test for detecting bilinearity in a stochastic unit root process is used to test for the presence of rational bubbles in banking equity indices. The empirical evidence for a set of 39 banking indices for different countries, after adjusting for GARCH effects, suggests that for more than 69% of these indices, the hypothesis of no unit root bilinearity is rejected. Therefore, the dynamics of banking asset prices in most countries are in conformity with rational bubbles and high speculation. This is true for both developed and emerging economies.