Asymmetric capital growth effects for the Helsinki office market

The present study examines whether office capital growth in the Helsinki property market adjusts asymmetrically to the business cycle over the period 1971Ò2002 using the framework of the autoregressive-moving average model with exogenous explanatory variables (ARIMAX). In order to introduce asymmetry into the base ARIMAX model and to examine different responses of office capital growth to its key driver, GDP, the latter was decomposed into two components, that is a growth rate above and below a pre-specified threshold. These two GDP growth rates represent Ïbad timesó or Ïgood timesó or recessions and recoveries in the Finnish economy. The threshold values were taken as the mean and the first quartile of annual GDP growth during the period 1971- 2002. The results indicate that capital growth in Helsinki adjusts asymmetrically to upturns and downturns of the Finnish economy with the adjustments to downturns being sharper. In the second stage, the study evaluates the forecasting performance of the symmetric and asymmetric models. The out-of-sample forecast performance of the models reveals that allowing for asymmetric responses clearly improves the forecasting adequacy of the models.