Detection of financial bubbles on the Moroccan stock market: an application of the augmented dickey-fuller test

Abstract

In this study, we focused on the existence of financial bubbles in the context of the Moroccan stock market, referring to the MASI index. Recognizing the presence of a bubble during the period 2003-2008, we used the ADF test, which is a standard technique used to address unit roots in time series. This period was marked by a general frenzy in the stock market and ended with the global financial crisis of 2008, and our results are therefore consistent with previous studies that showed bubbles had formed in other emerging markets. However, it is important to note that the ADF test has its own limitations. Its sensitivity to breakpoints and regime changes can sometimes lead to biased results. Moreover, the fact that a unit root was allegedly present is not conclusive evidence of the active presence of a bubble. There are also other methods such as GSADF tests or regime change models that could provide additional insights. Apart from statistical considerations, it is also important to evaluate the psychological and fundamental determinants of the emergence of bubbles. Herd behavior, excessive confidence, cognitive biases, favorable economic conditions, and an accommodative monetary policy.

Keywords: financial bubble, Augmented Dickey Fuller test, MASI stock market index, stock market crash, Overconfidence, financial crises 

JEL Classification: G01, G12, G14

Papertype: Empirical Research