ABSTRACT
On the basis of dividend discountedmodel with time-varying expected returns and using the logarithms of the dividend yields of stockmarkets in the G-7 countries, this paper detects speculative bubbles under considerations of a smooth break and non-linearity, respectively. To this end, we adopt a number of the non-linear unit root tests by taking account of non-linearity and a smooth break in the trend, respectively. Among the main results, it is found that the hypothesis of a unit root cannot be rejected for the logarithms of the dividend yields of the G7 countries by using the linear unit root tests. However, the empirical results are in support of a smooth break and favor non-linearity in the logarithms of the dividend yields of the G7 nations, implying that nonlinearity and a smooth break are indispensable features of the dividend yields of the G7 countries. This study also provides evidence that a stationary model that is capable of generating bubbles with a built-in mechanism to return back to a mean reverting dynamics.
JEL classification: G12, C22
