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Risk and Structural Instability in US House Prices

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  • Michail Karoglou

    ()

  • Bruce Morley

    ()

  • Dennis Thomas

    ()

Abstract

This paper employs a Component GARCH in Mean model to show that house prices across a number of major US cities between 1987 and 2009 have displayed asset market properties in terms of both risk-return relationships and asymmetric adjustment to shocks. In addition, tests for structural breaks in the mean and variance indicate structural instability across the data range. Multiple breaks are identified across all cities, particularly for the early 1990s and during the post-2007 financial crisis as housing has become an increasingly risky asset. Estimating the models over the individual sub-samples suggests that over the last 20 years the financial sector has increasingly failed to account for the levels of risk associated with real estate markets. This result has possible implications for the way in which financial institutions should be regulated in the future. Copyright Springer Science+Business Media, LLC 2013

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File URL: http://hdl.handle.net/10.1007/s11146-011-9332-1
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Bibliographic Info

Article provided by Springer in its journal The Journal of Real Estate Finance and Economics.

Volume (Year): 46 (2013)
Issue (Month): 3 (April)
Pages: 424-436

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Handle: RePEc:kap:jrefec:v:46:y:2013:i:3:p:424-436

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Web page: http://www.springerlink.com/link.asp?id=102945

Related research

Keywords: House prices; Risk; Structural instability; CGARCH;

References

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  1. Engle III, Robert F., 2003. "Risk and Volatility: Econometric Models and Financial Practice," Nobel Prize in Economics documents 2003-4, Nobel Prize Committee.
  2. 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.
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  11. Elena Andreou & Eric Ghysels, 2001. "Detecting Multiple Breaks in Financial Market Volatility Dynamics," University of Cyprus Working Papers in Economics 0202, University of Cyprus Department of Economics.
  12. 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.
  13. Mei-Se Chien, 2010. "Structural Breaks and the Convergence of Regional House Prices," The Journal of Real Estate Finance and Economics, Springer, vol. 40(1), pages 77-88, January.
  14. Dennis R. Capozza & Patric H. Hendershott & Charlotte Mack, 2004. "An Anatomy of Price Dynamics in Illiquid Markets: Analysis and Evidence from Local Housing Markets," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 32(1), pages 1-32, 03.
  15. Shaun A. Bond & G. Andrew Karolyi & Anthony B. Sanders, 2003. "International Real Estate Returns: A Multifactor, Multicountry Approach," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 31(3), pages 481-500, 09.
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