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Modelling house price volatility states in Cyprus with switching ARCH models

Author

Listed:
  • Christos S. Savva

    (Department of Commerce, Finance and Shipping, Cyprus University of Technology)

  • Nektarios A. Michail

    (Central Bank of Cyprus)

Abstract

A switching ARCH model is used to estimate the dynamics of the housing market price change volatility in Cyprus during the period 2001q1-2016q2. The results indicate that two states exist: one with high and one with low volatility. Both volatility states exhibit a high degree of persistence. The probability of being in the high volatility state is close to one in the early stages of the sample, and started its decrease when the Cypriot housing boom was peaking around 2008-2010. The findings suggest that booms could be re-enforcing, given the degree of persistence. In addition, higher volatility can be associated with higher credit growth during the period, suggesting that credit expansion can bring more investors to the housing market and increase speculation therein. As overall higher housing volatility increases systemic risk in the economy, the results point out that more regulation would perhaps be advisable.

Suggested Citation

  • Christos S. Savva & Nektarios A. Michail, 2017. "Modelling house price volatility states in Cyprus with switching ARCH models," Cyprus Economic Policy Review, University of Cyprus, Economics Research Centre, vol. 11(1), pages 69-82, June.
    • Handle: RePEc:erc:cypepr:v:11:y:2017:i:1:p:69-82
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    References listed on IDEAS

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    Cited by:

    1. Nektarios A. Michail & George Thucydides, 2018. "Does Housing Wealth Affect Consumption? The Case of Cyprus," Cyprus Economic Policy Review, University of Cyprus, Economics Research Centre, vol. 12(2), pages 67-86, December.
    2. Zhou Jie & Chai Hua Qi, 2023. "An equilibrium analysis of the impact of real estate price volatility on macroeconomics based on ant colony algorithm," Journal of Combinatorial Optimization, Springer, vol. 45(2), pages 1-26, March.
    3. Demetris Koursaros & Nektarios Michail & Niki Papadopoulou & Christos Savva, 2018. "To Create or to Redistribute? That is the Question," Working Papers 2018-4, Central Bank of Cyprus.

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