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Geographic Dependence and Diversification in House Price Returns: The Role of Leverage

Author

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  • Andréas Heinen
  • Mi Lim Kim
  • Malika Hamadi

Abstract

We analyze the time variation in the average dependence within a set of regional monthly house price index returns in a regime-switching multivariate copula model with a high and a low dependence regime. Using equidependent Gaussian copulas, we show that the dependence of house price returns varies across time with changes in credit market conditions, which reduces the gains from the geographic diversification of real estate and mortgage portfolios. More specifically, we show that a decrease in leverage, measured by the loan-to-value ratio, and to a lesser extent an increase in mortgage rates, are associated with a higher probability of moving to and staying in the high dependence regime.

Suggested Citation

  • Andréas Heinen & Mi Lim Kim & Malika Hamadi, 2024. "Geographic Dependence and Diversification in House Price Returns: The Role of Leverage," Journal of Financial Econometrics, Oxford University Press, vol. 22(1), pages 297-334.
    • Handle: RePEc:oup:jfinec:v:22:y:2024:i:1:p:297-334.
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    File URL: http://hdl.handle.net/10.1093/jjfinec/nbac037
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    More about this item

    Keywords

    copula; diversification; loan to value; mortgage; regime-switching; time-varying dependence;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C34 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Truncated and Censored Models; Switching Regression Models
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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