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An In-Sample and Out-of-Sample Empirical Investigation of the Nonlinearity in House Prices of South Africa

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Author Info

  • Mehmet Balcilar

    ()
    (Department of Economics, Eastern Mediterranean University, Famagusta, North Cyprus,via Mersin 10, Turkey)

  • Rangan Gupta

    ()
    (Department of Economics, University of Pretoria)

  • Zahra Shah

    ()
    (Department of Economics, University of Pretoria)

Abstract

This paper first tests if housing prices in the five segments of the South African housing market, namely, large-middle, medium-middle, small-middle, luxury and affordable, exhibits non-linearity based on smooth transition autoregressive (STAR) models estimated using quarterly data covering the period of 1970:Q2 to 2009:Q3. We find overwhelming evidence of non-linearity in these five segments based on in-sample evaluation of the linear and non-linear models. We then provide further support for non-linearity by comparing one- to four-quarters-ahead out-of-sample forecasts of the non-linear time series model with those of the classical and Bayesian versions of the linear autoregressive (AR) models for each of these segments, over an out-of-sample horizon of 2001:Q1 to 2009:Q3, using an in-sample period from 1970:Q2 to 2000:Q4. Our results indicate that barring the one-, two and four-step(s)-ahead forecasts of the small-middle-segment, the non-linear model always outperforms the linear models.

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Bibliographic Info

Paper provided by University of Pretoria, Department of Economics in its series Working Papers with number 201008.

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Length: 17 pages
Date of creation: Mar 2010
Date of revision:
Handle: RePEc:pre:wpaper:201008

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Keywords: Bayesian autoregressive models; Housing market; smooth transition autoregressive models; Forecast accuracy;

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References

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Citations

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Cited by:
  1. Luis A. Gil-Alana & Goodness C. Aye & Rangan Gupta, 2012. "Testing for Persistence with Breaks and Outliers in South African House Prices," Faculty Working Papers, School of Economics and Business Administration, University of Navarra 20/12, School of Economics and Business Administration, University of Navarra.
  2. Mirriam Chitalu Chama-Chiliba & Rangan Gupta & Nonophile Nkambule & Naomi Tlotlego, 2011. "Forecasting Key Macroeconomic Variables of the South African Economy Using Bayesian Variable Selection," Working Papers, University of Pretoria, Department of Economics 201132, University of Pretoria, Department of Economics.
  3. Roula Inglesi-Lotz & Rangan Gupta, 2011. "Relationship between House Prices and Inflation in South Africa: An ARDL Approach," Working Papers, University of Pretoria, Department of Economics 201130, University of Pretoria, Department of Economics.
  4. Mehmet Balcilar & Rangan Gupta & Stephen M. Miller, 2012. "The Out-of-Sample Forecasting Performance of Non-Linear Models of Regional Housing Prices in the US," Working Papers, University of Pretoria, Department of Economics 201226, University of Pretoria, Department of Economics.
  5. Cengiz, Sibel & Sahin, Afsin, 2013. "Modelling Nonlinear Behavior of Labor Force Participation Rate by STAR: An Application for Turkey," MPRA Paper 47805, University Library of Munich, Germany, revised 07 May 2013.
  6. Novella Maugeri, 2010. "Money Illusion and Rational Expectations: New Evidence from Well Known Survey Data," Department of Economics University of Siena, Department of Economics, University of Siena 606, Department of Economics, University of Siena.
  7. Tsangyao Chang & Tsung-pao Wu & Rangan Gupta, 2013. "Are House Prices in South Africa Really Non-Stationary? Evidence from SPSM-Based Panel KSS Test with a Fourier Function," Working Papers, University of Pretoria, Department of Economics 201324, University of Pretoria, Department of Economics.
  8. Tsangyao Chang & Wen-Chi Liu & Goodness C. Aye & Rangan Gupta, 2013. "Are there Housing Bubbles in South Africa? Evidence from SPSM-Based Panel KSS Test with a Fourier Function," Working Papers, University of Pretoria, Department of Economics 201377, University of Pretoria, Department of Economics.

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