IDEAS home Printed from https://ideas.repec.org/a/eee/regeco/v41y2011i3p293-304.html
   My bibliography  Save this article

Should the optimal portfolio be region-specific? A multi-region model with monetary policy and asset price co-movements

Author

Listed:
  • Leung, Charles Ka Yui
  • Teo, Wing Leong

Abstract

A multi-region, dynamic stochastic general equilibrium (MRDSGE) model is built to show that differences in the price elasticity of housing supply can be related to stylized facts on regional differences in (1) house price level, (2) house price volatility, (3) monetary policy propagation mechanism and (4) household asset portfolio. In addition, regional house prices are found to move more closely with regional fundamentals than with the national GDP. The correlation between the national stock price and the regional housing price also vary significantly across regions, which suggests that optimal portfolio should be region specific.

Suggested Citation

  • Leung, Charles Ka Yui & Teo, Wing Leong, 2011. "Should the optimal portfolio be region-specific? A multi-region model with monetary policy and asset price co-movements," Regional Science and Urban Economics, Elsevier, vol. 41(3), pages 293-304, May.
  • Handle: RePEc:eee:regeco:v:41:y:2011:i:3:p:293-304
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0166-0462(11)00006-8
    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 below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Charles Leung, 2007. "Equilibrium Correlations of Asset Price and Return," The Journal of Real Estate Finance and Economics, Springer, vol. 34(2), pages 233-256, February.
    2. Julio J. Rotemberg & Michael Woodford, 1998. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy: Expanded Version," NBER Technical Working Papers 0233, National Bureau of Economic Research, Inc.
    3. Greenwood, Jeremy & Hercowitz, Zvi, 1991. "The Allocation of Capital and Time over the Business Cycle," Journal of Political Economy, University of Chicago Press, vol. 99(6), pages 1188-1214, December.
    4. Cho, Jang-Ok & Cooley, Thomas F, 1995. "The Business Cycle with Nominal Contracts," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 6(1), pages 13-33, June.
    5. Jermann, Urban J., 2010. "The equity premium implied by production," Journal of Financial Economics, Elsevier, vol. 98(2), pages 279-296, November.
    6. Berliant, Marcus & Kung, Fan-chin, 2009. "Bifurcations in regional migration dynamics," Regional Science and Urban Economics, Elsevier, vol. 39(6), pages 714-720, November.
    7. Aubhik Khan & Robert G. King & Alexander L. Wolman, 2003. "Optimal Monetary Policy," Review of Economic Studies, Oxford University Press, vol. 70(4), pages 825-860.
    8. Schmitt-Grohe, Stephanie & Uribe, Martin, 2007. "Optimal simple and implementable monetary and fiscal rules," Journal of Monetary Economics, Elsevier, vol. 54(6), pages 1702-1725, September.
    9. Gerald A. Carlino & Robert H. DeFina, 1997. "The differential regional effects of monetary policy: evidence from the U.S. States," Working Papers 97-12, Federal Reserve Bank of Philadelphia, revised 01 Mar 1998.
    10. Morris A. Davis, 2010. "housing and the business cycle," The New Palgrave Dictionary of Economics, Palgrave Macmillan.
    11. Matthew B. Canzoneri & Robert E. Cumby & Behzad T. Diba, 2005. "Price- and wage- inflation targeting: variations on a theme by Erceg, Henderson, and Levin," Proceedings, Board of Governors of the Federal Reserve System (U.S.), pages 181-215.
    12. Baxter, Marianne & Jermann, Urban J. & King, Robert G., 1998. "Nontraded goods, nontraded factors, and international non-diversification," Journal of International Economics, Elsevier, vol. 44(2), pages 211-229, April.
    13. Albert Saiz, 2010. "The Geographic Determinants of Housing Supply," The Quarterly Journal of Economics, Oxford University Press, vol. 125(3), pages 1253-1296.
    14. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
    15. Tesar, Linda L., 1993. "International risk-sharing and non-traded goods," Journal of International Economics, Elsevier, vol. 35(1-2), pages 69-89, August.
    16. William N. Goetzmann & Massimo Massa & Andrei Simonov, 2004. "Portfolio Diversification and City Agglomeration," NBER Working Papers 10343, National Bureau of Economic Research, Inc.
    17. Woodford, Michael, 2010. "Optimal Monetary Stabilization Policy," Handbook of Monetary Economics,in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 14, pages 723-828 Elsevier.
    18. Leung, Charles, 2004. "Macroeconomics and housing: a review of the literature," Journal of Housing Economics, Elsevier, vol. 13(4), pages 249-267, December.
    19. Edward L. Glaeser & Joseph Gyourko & Raven Saks, 2003. "Why is Manhattan So Expensive? Regulation and the Rise in House Prices," Harvard Institute of Economic Research Working Papers 2020, Harvard - Institute of Economic Research.
    20. Richard K. Green & Stephen Malpezzi & Stephen K. Mayo, 2005. "Metropolitan-Specific Estimates of the Price Elasticity of Supply of Housing, and Their Sources," American Economic Review, American Economic Association, vol. 95(2), pages 334-339, May.
    21. Min Hwang & John M. Quigley, 2006. "Economic Fundamentals In Local Housing Markets: Evidence From U.S. Metropolitan Regions," Journal of Regional Science, Wiley Blackwell, vol. 46(3), pages 425-453.
    22. François Ortalo-Magné & Andrea Prat, 2005. "The Political Economy of Housing Supply," Levine's Bibliography 122247000000000954, UCLA Department of Economics.
    23. Edward L. Glaeser & Joseph Gyourko & Raven E. Saks, 2005. "Why Have Housing Prices Gone Up?," American Economic Review, American Economic Association, vol. 95(2), pages 329-333, May.
    24. Christiano, Lawrence J. & Trabandt, Mathias & Walentin, Karl, 2010. "DSGE Models for Monetary Policy Analysis," Handbook of Monetary Economics,in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 7, pages 285-367 Elsevier.
    25. Fratantoni, Michael & Schuh, Scott, 2003. " Monetary Policy, Housing, and Heterogeneous Regional Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(4), pages 557-589, August.
    26. Jermann, Urban J., 2002. "International portfolio diversification and endogenous labor supply choice," European Economic Review, Elsevier, vol. 46(3), pages 507-522, March.
    27. Goetzmann, William & Massa, Massimo & Simonov, Andrei, 2004. "Portfolio Diversification, Proximity Investment and City Agglomeration," CEPR Discussion Papers 4786, C.E.P.R. Discussion Papers.
    28. Gerald Carlino & Robert Defina, 1998. "The Differential Regional Effects Of Monetary Policy," The Review of Economics and Statistics, MIT Press, vol. 80(4), pages 572-587, November.
    29. Tesar, Linda L. & Werner, Ingrid M., 1995. "Home bias and high turnover," Journal of International Money and Finance, Elsevier, vol. 14(4), pages 467-492, August.
    30. Schmitt-Grohé, Stephanie & Uribe, Martín, 2006. "Optimal fiscal and monetary policy in a medium-scale macroeconomic model," Working Paper Series 612, European Central Bank.
    31. Stephanie Schmitt-Grohé & Martín Uribe, 2006. "Optimal Fiscal and Monetary Policy in a Medium-Scale Macroeconomic Model," NBER Chapters,in: NBER Macroeconomics Annual 2005, Volume 20, pages 383-462 National Bureau of Economic Research, Inc.
    32. Glaeser, Edward L & Gyourko, Joseph & Saks, Raven, 2005. "Why Is Manhattan So Expensive? Regulation and the Rise in Housing Prices," Journal of Law and Economics, University of Chicago Press, vol. 48(2), pages 331-369, October.
    33. Marion Kohler & Kylie Smith, 2005. "Housing and the Household Wealth Portfolio: The Role of Location," RBA Research Discussion Papers rdp2005-10, Reserve Bank of Australia.
    34. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
    35. Jermann, Urban J., 1998. "Asset pricing in production economies," Journal of Monetary Economics, Elsevier, vol. 41(2), pages 257-275, April.
    36. Epple, Dennis & Nechyba, Thomas, 2004. "Fiscal decentralization," Handbook of Regional and Urban Economics,in: J. V. Henderson & J. F. Thisse (ed.), Handbook of Regional and Urban Economics, edition 1, volume 4, chapter 55, pages 2423-2480 Elsevier.
    37. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
    38. 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.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Leung, Charles Ka Yui, 2014. "Error correction dynamics of house prices: An equilibrium benchmark," Journal of Housing Economics, Elsevier, vol. 25(C), pages 75-95.
    2. repec:spr:empeco:v:54:y:2018:i:3:d:10.1007_s00181-017-1255-0 is not listed on IDEAS
    3. Leung, Charles Ka Yui & Tang, Edward Chi Ho, 2014. "Availability, Affordability and Volatility: the case of Hong Kong Housing Market," MPRA Paper 58770, University Library of Munich, Germany.
    4. Leung, Charles Ka Yui & Shi, Song & Ho Tang, Edward Chi, 2013. "Commodity house prices," Regional Science and Urban Economics, Elsevier, vol. 43(6), pages 875-887.
    5. Charles Ka Yui Leung, 2015. "Availability, Affordability and Volatility: The Case of the Hong Kong Housing Market," International Real Estate Review, Asian Real Estate Society, vol. 18(3), pages 383-428.
    6. Hans Haller & Ming Yi, 2013. "Paths of a Continuum of Independent Random Variables," Working Papers e07-44, Virginia Polytechnic Institute and State University, Department of Economics.
    7. MeiChi Huang & LinYing Yeh, 2015. "Should the Fed take extra action for the recent housing bubble? Evidence from asymmetric transitory shocks," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 39(4), pages 762-781, October.
    8. Yum K. Kwan & Jinyue Dong, 2014. "Stock Price Dynamics of China: What Do the Asset Markets Tell Us About the Chinese Utility Function?," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 50(03), pages 77-108, May.
    9. Heeho Kim & SaeWoon Park & Sun Hye Lee, 2012. "House Price and Bank Lending in a Premium Submarket in Korea," International Real Estate Review, Asian Real Estate Society, vol. 15(1), pages 1-42.
    10. repec:eee:reveco:v:55:y:2018:i:c:p:145-172 is not listed on IDEAS

    More about this item

    Keywords

    Regional economic difference Monetary policy Housing market Region-specific portfolio;

    JEL classification:

    • R10 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - General
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:regeco:v:41:y:2011:i:3:p:293-304. 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: (Dana Niculescu). General contact details of provider: http://www.elsevier.com/locate/regec .

    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 CitEc recognized a reference but did not link an item in RePEc 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.