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An early warning system to predict speculative house price bubbles

  • Dreger, Christian
  • Kholodilin, Konstantin A.

In this paper, the authors construct country-specific chronologies of the house price bubbles for 12 OECD countries over the period 1969:Q1-2009:Q4. These chronologies are obtained using a combination of a fundamental approach and a filter approach. The resulting speculative bubble chronology is the one which provides the highest concordance between these two techniques. In addition, the authors suggest an early warning system based on three alternative approaches: A signalling approach, a logit model, and a probit model. It is shown that the latter two models allow much more accurate predictions of house price bubbles than the signalling approach. Furthermore, the predictive accuracy of the logit and probit models is high enough to make them useful in forecasting future speculative bubbles in housing market. Thus, this method can be used by the policymakers in their attempts to quickly detect house price bubbles and attenuate their devastating effects on the domestic and world economy.

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File URL: http://dx.doi.org/10.5018/economics-ejournal.ja.2013-8
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File URL: http://econstor.eu/bitstream/10419/71403/1/739273035.pdf
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Article provided by Kiel Institute for the World Economy in its journal Economics: The Open-Access, Open-Assessment E-Journal.

Volume (Year): 7 (2013)
Issue (Month): ()
Pages: 1-26

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Handle: RePEc:zbw:ifweej:20138
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  1. Christian Dreger & Hans-Eggert Reimers, 2009. "The Role of Asset Markets for Private Consumption: Evidence from Paneleconometric Models," Discussion Papers of DIW Berlin 872, DIW Berlin, German Institute for Economic Research.
  2. Setzer, Ralph & van den Noord, Paul & Wolff, Guntram B., 2010. "Heterogeneity in money holdings across euro area countries: The role of housing," Discussion Paper Series 1: Economic Studies 2010,04, Deutsche Bundesbank, Research Centre.
  3. Case, Karl E. & Quigley, John M. & Shiller, Robert J., 2005. "Comparing Wealth Effects: The Stock Market versus the Housing Market," Berkeley Program on Housing and Urban Policy, Working Paper Series qt28d3s92s, Berkeley Program on Housing and Urban Policy.
  4. Francis X. Diebold & Glenn D. Rudebusch, 1987. "Scoring the leading indicators," Special Studies Papers 206, Board of Governors of the Federal Reserve System (U.S.).
  5. Holly, Sean & Hashem Pesaran, M. & Yamagata, Takashi, 2011. "The spatial and temporal diffusion of house prices in the UK," Journal of Urban Economics, Elsevier, vol. 69(1), pages 2-23, January.
  6. Carroll, Christopher D. & Otsuka, Misuzu & Slacalek, Jirka, 2006. "How large is the housing wealth effect? A new approach," CFS Working Paper Series 2006/35, Center for Financial Studies (CFS).
  7. Matteo Iacoviello, 2005. "House Prices, Borrowing Constraints, and Monetary Policy in the Business Cycle," American Economic Review, American Economic Association, vol. 95(3), pages 739-764, June.
  8. Joshua Aizenman & Yothin Jinjarak, 2008. "Current Account Patterns and National Real Estate Markets," NBER Working Papers 13921, National Bureau of Economic Research, Inc.
  9. Matteo Iacoviello & Stefano Neri, 2008. "Housing market spillovers: Evidence from an estimated DSGE model," Temi di discussione (Economic working papers) 659, Bank of Italy, Economic Research and International Relations Area.
  10. Alessi, Lucia & Detken, Carsten, 2011. "Quasi real time early warning indicators for costly asset price boom/bust cycles: A role for global liquidity," European Journal of Political Economy, Elsevier, vol. 27(3), pages 520-533, September.
  11. Konstantin A. Kholodilin & Jan-Oliver Menz & Boriss Siliverstovs, 2010. "What Drives Housing Prices Down? Evidence from an International Panel," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), Justus-Liebig University Giessen, Department of Statistics and Economics, vol. 230(1), pages 59-76, February.
  12. Yucel, Eray, 2011. "A Review and Bibliography of Early Warning Models," MPRA Paper 32893, University Library of Munich, Germany.
  13. James M. Poterba, 2000. "Stock Market Wealth and Consumption," Journal of Economic Perspectives, American Economic Association, vol. 14(2), pages 99-118, Spring.
  14. Christian Dreger & Jürgen Wolters, 2009. "Money velocity and asset prices in the euro area," Empirica, Springer, vol. 36(1), pages 51-63, February.
  15. Enrique Mendoza & Marco Terrones, 2012. "An Anatomy of Credit Booms and their Demise," Working Papers Central Bank of Chile 670, Central Bank of Chile.
  16. Kostas Tsatsaronis & Haibin Zhu, 2004. "What drives housing price dynamics: cross-country evidence," BIS Quarterly Review, Bank for International Settlements, March.
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