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Testing for Cointegration between House Prices and Economic Fundamentals

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  • Jian Zhou
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    Abstract

    Economic theory predicts three possibilities for the cointegration relationship between house prices and economic fundamentals: linear cointegration, nonlinear cointegration and no cointegration. In contrast, the empirical literature has only examined linear cointegration. This article argues that ignoring nonlinear cointegration may lead to misleading conclusions that no cointegration exists between house prices and the fundamentals. To illustrate this point, I test for cointegration for ten U.S. cities and find that only one city shows evidence of linear cointegration. Further analysis using the two-step testing procedure yields evidence of nonlinear cointegration for six other cities. Still, there are three cities left out without evidence of nonlinear cointegration. Further studies are needed to test for other forms of nonlinear cointegration before a conclusion of no cointegration can be reached for the remaining three cities.

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    File URL: http://hdl.handle.net/10.1111/j.1540-6229.2010.00273.x
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    Bibliographic Info

    Article provided by American Real Estate and Urban Economics Association in its journal Real Estate Economics.

    Volume (Year): 38 (2010)
    Issue (Month): 4 (Winter)
    Pages: 599-632

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    Handle: RePEc:bla:reesec:v:38:y:2010:i:4:p:599-632

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    Cited by:
    1. André K. Anundsen, 2012. "Econometric regime shifts and the US subprime bubble," National Bank of Poland Working Papers 126, National Bank of Poland, Economic Institute.
    2. Qingyu, Zhu, 2010. "Regional unemployment and house price determination," MPRA Paper 41785, University Library of Munich, Germany.
    3. Jayaraman, Praveena & Gebremedhin, Tesfa G., 2013. "A Non-Spatial Analysis of the Role of Residential Real Estate Investment in the Economic Development of the Northeast Region of the United States," 2013 Annual Meeting, February 2-5, 2013, Orlando, Florida 143107, Southern Agricultural Economics Association.
    4. Lee, Chien-Chiang & Zeng, Jhih-Hong, 2011. "Revisiting the relationship between spot and futures oil prices: Evidence from quantile cointegrating regression," Energy Economics, Elsevier, vol. 33(5), pages 924-935, September.

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