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Modelling house price volatility states in the UK by switching ARCH models

Author

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  • I-Chun Tsai
  • Ming-Chi Chen
  • Tai Ma

Abstract

This article analyses investment risk in the housing market by examining volatility properties of house prices for the UK. We use both ARCH and GARCH models to estimate price conditional heteroscedasticity and find evidence of a time-varying property in the volatilities of the house price series. We then use the SWARCH model and find there are three volatility states in the price series. Our estimations suggest the UK housing markets are relatively stable and different states do not switch very often. The magnitude of high price volatility is as high as 20.99 times of the low volatility for the older housing market and 14 times of the low volatility for the new housing market. In addition, the older housing market is less efficient than the new housing market, since the impacts of events on the volatility state of the older house prices is more lasting than in new housing market.

Suggested Citation

  • I-Chun Tsai & Ming-Chi Chen & Tai Ma, 2010. "Modelling house price volatility states in the UK by switching ARCH models," Applied Economics, Taylor & Francis Journals, vol. 42(9), pages 1145-1153.
    • Handle: RePEc:taf:applec:v:42:y:2010:i:9:p:1145-1153
    DOI: 10.1080/00036840701721133
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    Cited by:

    1. Bruce Morley & Dennis Thomas, 2016. "An Empirical Analysis of UK House Price Risk Variation by Property Type," Review of Economics & Finance, Better Advances Press, Canada, vol. 6, pages 45-56, May.
    2. Kuang-Liang Chang & Charles Ka Yui Leung, 2022. "How did the asset markets change after the Global Financial Crisis?," Chapters, in: Charles K.Y. Leung (ed.), Handbook of Real Estate and Macroeconomics, chapter 12, pages 312-336, Edward Elgar Publishing.
    3. Richard Whittle & Thomas Davies & Matthew Gobey & John Simister, 2014. "Behavioural Economics and House Prices: A Literature Review," Business and Management Horizons, Macrothink Institute, vol. 2(2), pages 15-28, December.
    4. Nicholas Apergis & James E. Payne, 2020. "Modeling the time varying volatility of housing returns: Further evidence from the U.S. metropolitan condominium markets," Review of Financial Economics, John Wiley & Sons, vol. 38(1), pages 24-33, January.
    5. Chatziantoniou, Ioannis & Filis, George & Floros, Christos, 2017. "Asset prices regime-switching and the role of inflation targeting monetary policy," Global Finance Journal, Elsevier, vol. 32(C), pages 97-112.
    6. 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.
    7. Eddie Chi-man Hui & Xian Zheng, 2012. "The dynamic correlation and volatility of real estate price and rental: an application of MSV model," Applied Economics, Taylor & Francis Journals, vol. 44(23), pages 2985-2995, August.
    8. Jos魍ar𨁍ontero-Lorenzo & Beatriz Larraz-Iribas, 2012. "Space-time approach to commercial property prices valuation," Applied Economics, Taylor & Francis Journals, vol. 44(28), pages 3705-3715, October.
    9. Kyriaki Begiazi & Paraskevi Katsiampa, 2019. "Modelling UK House Prices with Structural Breaks and Conditional Variance Analysis," The Journal of Real Estate Finance and Economics, Springer, vol. 58(2), pages 290-309, February.
    10. Bruce Morley & Dennis Thomas, 2018. "Covariance Risk and the Ripple Effect in the UK Regional Housing Market," Review of Economics & Finance, Better Advances Press, Canada, vol. 13, pages 1-13, August.
    11. Yuan Zhang & Yiguo Sun & Thanasis Stengos, 2019. "Spatial Dependence in the Residential Canadian Housing Market," The Journal of Real Estate Finance and Economics, Springer, vol. 58(2), pages 223-263, February.
    12. Paraskevi Katsiampa & Kyriaki Begiazi, 2019. "An empirical analysis of the Scottish housing market by property type," Scottish Journal of Political Economy, Scottish Economic Society, vol. 66(4), pages 559-583, September.

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