Advanced Search
MyIDEAS: Login to save this article or follow this journal

House price dynamics, conditional higher-order moments, and density forecasts

Contents:

Author Info

  • Chang, Kuang-Liang
Registered author(s):

    Abstract

    Most studies on housing price dynamics are only concerned with the conditional mean and variance, but overlook other higher-order conditional moments and the structural change characteristics inherent in housing prices. In order to take into account these two important issues, this study utilizes the generalized Markov switching GARCH model to explore house price dynamics and conditional distribution for US market over 1975Q1-2007Q4. The housing return follows two distinct dynamics: the bust regime and the boom regime. The volatility pattern is different in the bust and boom regimes. In addition, the conditional densities derived by the regime-switching model change dramatically over time and are significantly different from normal distribution. More importantly, the regime-switching model can detect in advance a weak US housing market such as the one that occurred in the middle of 2007. The in-sample fitting ability of regime-switching model, which incorporates higher-order moments, has significant improvements compared to the single-regime AR and AR-GARCH models. For the out-of-sample Value-at-Risk forecasting performance, the ability of regime-switching AR-GARCH model to forecast one-step-ahead density is better compared to the single-regime AR-GARCH model.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://www.sciencedirect.com/science/article/B6VB1-506SXCP-2/2/e6279339b52861192dec4dbd97a262df
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Bibliographic Info

    Article provided by Elsevier in its journal Economic Modelling.

    Volume (Year): 27 (2010)
    Issue (Month): 5 (September)
    Pages: 1029-1039

    as in new window
    Handle: RePEc:eee:ecmode:v:27:y:2010:i:5:p:1029-1039

    Contact details of provider:
    Web page: http://www.elsevier.com/locate/inca/30411

    Related research

    Keywords: House price dynamics Markov regime-switching GARCH model Conditional distribution Density forecasting;

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. Colin Lizieri & Stephen Satchell & Qi Zhang, 2006. "The Underlying Return Generating Factors for REIT Returns: An Application of Independent Component Analysis," Real Estate & Planning Working Papers rep-wp2006-12, Henley Business School, Reading University.
    2. Englund, P. & Ioannides, Y.M., 1996. "House Price Dynamics: An International Empirical Perspective," Papers 1996-01, Uppsala - Working Paper Series.
    3. Muellbauer, John & Murphy, Anthony, 1997. "Booms and Busts in the UK Housing Market," Economic Journal, Royal Economic Society, vol. 107(445), pages 1701-27, November.
    4. Massimo Giuliodori, 2005. "The Role Of House Prices In The Monetary Transmission Mechanism Across European Countries," Scottish Journal of Political Economy, Scottish Economic Society, vol. 52(4), pages 519-543, 09.
    5. Massimo Guidolin & Allan Timmerman, 2005. "Term structure of risk under alternative econometric specifications," Working Papers 2005-001, Federal Reserve Bank of St. Louis.
    6. Diebold, Francis X & Mariano, Roberto S, 2002. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 134-44, January.
    7. Ming-Yuan Leon Li & Hsiou-wei William Lin, 2004. "Estimating value-at-risk via Markov switching ARCH models - an empirical study on stock index returns," Applied Economics Letters, Taylor & Francis Journals, vol. 11(11), pages 679-691.
    8. Giorgio Valente & Lucio Sarno, 2004. "Modeling and Forecasting Stock Returns: Exploiting the Futures Market, Regime Shifts and International Spillovers," Working Papers wp04-11, Warwick Business School, Finance Group.
    9. Allan Timmermann & Gabriel Perez-Quiros, 1999. "Firm Size and Cyclical Variations in Stock Returns," FMG Discussion Papers dp335, Financial Markets Group.
    10. Case, Karl E. & Quigley, John M. & Shiller, Robert J., 2012. "Comparing Wealth Effects: The Stock Market versus The Housing Market," Department of Economics, Working Paper Series qt6px1d1sc, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    11. Susanne Cannon & Norman G. Miller & Gurupdesh S. Pandher, 2006. "Risk and Return in the U.S. Housing Market: A Cross-Sectional Asset-Pricing Approach," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 34(4), pages 519-552, December.
    12. Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
    13. Pierre Giot & Sébastien Laurent, 2003. "Value-at-risk for long and short trading positions," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 18(6), pages 641-663.
    14. Perez-Quiros, Gabriel & Timmermann, Allan, 2001. "Business cycle asymmetries in stock returns: Evidence from higher order moments and conditional densities," Journal of Econometrics, Elsevier, vol. 103(1-2), pages 259-306, July.
    15. Hall, Stephen & Psaradakis, Zacharias & Sola, Martin, 1997. "Switching error-correction models of house prices in the United Kingdom," Economic Modelling, Elsevier, vol. 14(4), pages 517-527, October.
    16. Lamoureux, Christopher G & Lastrapes, William D, 1990. "Persistence in Variance, Structural Change, and the GARCH Model," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(2), pages 225-34, April.
    17. Brown, Jane P. & Song, Haiyan & McGillivray, Alan, 1997. "Forecasting UK house prices: A time varying coefficient approach," Economic Modelling, Elsevier, vol. 14(4), pages 529-548, October.
    18. Anthony Y. Gu, 2002. "The Predictability of House Prices," Journal of Real Estate Research, American Real Estate Society, vol. 24(3), pages 213-234.
    19. William Miles, 2008. "Volatility Clustering in U.S. Home Prices," Journal of Real Estate Research, American Real Estate Society, vol. 30(1), pages 73-90.
    20. Gray, Stephen F., 1996. "Modeling the conditional distribution of interest rates as a regime-switching process," Journal of Financial Economics, Elsevier, vol. 42(1), pages 27-62, September.
    21. Zacharias Psaradakis & Nicola Spagnolo, 2006. "Joint Determination of the State Dimension and Autoregressive Order for Models with Markov Regime Switching," Journal of Time Series Analysis, Wiley Blackwell, vol. 27(5), pages 753-766, 09.
    22. Hamilton, James D. & Susmel, Raul, 1994. "Autoregressive conditional heteroskedasticity and changes in regime," Journal of Econometrics, Elsevier, vol. 64(1-2), pages 307-333.
    23. Elbourne, Adam, 2008. "The UK housing market and the monetary policy transmission mechanism: An SVAR approach," Journal of Housing Economics, Elsevier, vol. 17(1), pages 65-87, March.
    24. Walter Dolde & Dogan Tirtiroglu, 2002. "Housing Price Volatility Changes and Their Effects," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 30(1), pages 41-66.
    25. Michael Young, 2008. "Revisiting Non-normal Real Estate Return Distributions by Property Type in the U.S," The Journal of Real Estate Finance and Economics, Springer, vol. 36(2), pages 233-248, February.
    26. Harvey, David & Leybourne, Stephen & Newbold, Paul, 1997. "Testing the equality of prediction mean squared errors," International Journal of Forecasting, Elsevier, vol. 13(2), pages 281-291, June.
    27. Pownall, Rachel A. J. & Koedijk, Kees G., 1999. "Capturing downside risk in financial markets: the case of the Asian Crisis," Journal of International Money and Finance, Elsevier, vol. 18(6), pages 853-870, December.
    28. Gordon W. Crawford & Michael C. Fratantoni, 2003. "Assessing the Forecasting Performance of Regime-Switching, ARIMA and GARCH Models of House Prices," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 31(2), pages 223-243, 06.
    29. Massimo Guidolin & Allan Timmermann, 2005. "Economic Implications of Bull and Bear Regimes in UK Stock and Bond Returns," Economic Journal, Royal Economic Society, vol. 115(500), pages 111-143, 01.
    30. Walter Dolde & Dogan Tirtiroglu, 1997. "Temporal and Spatial Information Diffusion in Real Estate Price Changes and Variances," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 25(4), pages 539-565.
    31. Michael S. Young & Stephen L. Lee & Steven P. Devaney, 2006. "Non‐Normal Real Estate Return Distributions by Property Type in the UK," Journal of Property Research, Taylor & Francis Journals, vol. 23(2), pages 109-133, March.
    32. Iacoviello, Matteo & Minetti, Raoul, 2008. "The credit channel of monetary policy: Evidence from the housing market," Journal of Macroeconomics, Elsevier, vol. 30(1), pages 69-96, March.
    33. Norman Miller & Liang Peng, 2006. "Exploring Metropolitan Housing Price Volatility," The Journal of Real Estate Finance and Economics, Springer, vol. 33(1), pages 5-18, August.
    34. Berkowitz, Jeremy, 2001. "Testing Density Forecasts, with Applications to Risk Management," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(4), pages 465-74, October.
    35. Bond, Shaun A & Patel, Kanak, 2003. "The Conditional Distribution of Real Estate Returns: Are Higher Moments Time Varying?," The Journal of Real Estate Finance and Economics, Springer, vol. 26(2-3), pages 319-39, March-May.
    36. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-84, March.
    37. Richard A. Graff & Adrian Harrington & Michael S. Young, 1997. "The Shape of Australian Real Estate Return Distributions and Comparisons to the United States," Journal of Real Estate Research, American Real Estate Society, vol. 14(3), pages 291-308.
    38. White, Halbert, 1982. "Maximum Likelihood Estimation of Misspecified Models," Econometrica, Econometric Society, vol. 50(1), pages 1-25, January.
    39. Paul H. Kupiec, 1995. "Techniques for verifying the accuracy of risk measurement models," Finance and Economics Discussion Series 95-24, Board of Governors of the Federal Reserve System (U.S.).
    40. Billio, Monica & Pelizzon, Loriana, 2000. "Value-at-Risk: a multivariate switching regime approach," Journal of Empirical Finance, Elsevier, vol. 7(5), pages 531-554, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:eee:ecmode:v:27:y:2010:i:5:p:1029-1039. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.