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Signal Extraction with Kalman Filter: A Study of the Hong Kong Property Price Bubbles

  • Qin Xiao

    (Division of Economics,School of Humanities and Social Sciences, Nanyang Technological University, Singapore)

  • Randolph Gee Kwang Tan

    (Division of Economics,School of Humanities and Social Sciences, Nanyang Technological University, Singapore)

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Since Flood and Garber (1980), the debate surrounding speculative bubbles has never subsided. A key obstacle to resolve this issue is the identification problem. A bubble is usually inferred from some assumed fundamental determinants of a price. These assumptions could be over-simplified. Furthermore, there might be data measurement errors. In this paper, we attempt to capture such errors with a latent state variable. This variable is extracted with Kalman filter. Based on our empirical comparisons, we find that it is possible to attribute the observed large price swings in the property market of Hong Kong during the 1980s and 1990s to a periodically collapsing rational speculative bubble.

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File URL: http://www3.ntu.edu.sg/hss2/egc/wp/2006/2006-01.pdf
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Paper provided by Nanyang Technological University, School of Humanities and Social Sciences, Economic Growth Centre in its series Economic Growth Centre Working Paper Series with number 0601.

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Length: 51 pages
Date of creation: Jan 2006
Date of revision:
Handle: RePEc:nan:wpaper:0601
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Web page: http://egc.hss.ntu.edu.sg/

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