Identification of Multiple Bubbles in Tehran Stock Exchange Using Right-Tailed Markov Switching Unit Root Test

The main purpose of this study is to identify multiple bubbles in the Tehran Stock Exchange. For this purpose, monthly data of price to earning ratio (P/E) in the period 2001:3 to 2020:6 and the approach proposed by Hall et al. (1999) have been used. Hall et al. method is based on a nonlinear unit root test that follows a Markov Switching process. In fact, in this approach, one regime belongs to periods of the market in which the market is going through a normal course (the price-to-earnings ratio’ root is less than or equal to one), and the other regime includes periods in which the market is bubbly (price-to-earnings ratio has a root greater than one). The results of this study show that the price-to-earning ratio has had explosive behavior in several time periods since 2001, or in other words, has experienced bubble conditions. The smoothed probabilities for bubble periods as well as other criteria such as the value of the nominal and real TEPIX, price to earning ratio and the ratio of market value to GDP shows that the period from April 2020 to June 2020 is the biggest bubble in the history of Tehran Stock Exchange.