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Explosive bubbles in house prices? Evidence from the OECD countries

Author

Listed:
  • Tom Engsted

    (Aarhus University and CREATES)

  • Simon J. Hviid

    (Aarhus University and CREATES)

  • Thomas Q. Pedersen

    (Aarhus University and CREATES)

Abstract

We conduct an econometric analysis of bubbles in housing markets in the OECD area, using quarterly OECD data for 18 countries from 1970 to 2013. We pay special attention to the explosive nature of bubbles and use econometric methods that explicitly allow for explosiveness. First, we apply the univariate right-tailed unit root test procedure of Phillips et al. (2012) on the individual countries price-rent ratio. Next, we use Engsted and Nielsen's (2012) co-explosive VAR framework to test for bubbles. We find evidence of explosiveness in many housing markets, thus supporting the bubble hypothesis. However, we also find interesting differences in the conclusions across the two test procedures. We attribute these differences to how the two test procedures control for cointegration between house prices and rent.

Suggested Citation

  • Tom Engsted & Simon J. Hviid & Thomas Q. Pedersen, 2015. "Explosive bubbles in house prices? Evidence from the OECD countries," CREATES Research Papers 2015-01, Department of Economics and Business Economics, Aarhus University.
    • Handle: RePEc:aah:create:2015-01
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    References listed on IDEAS

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    More about this item

    Keywords

    Co-explosive VAR model; right-tailed unit root tests; date-stamping bubble periods; price-to-rent ratio;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • 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
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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