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Does the Interest Risk Premium Predict Housing Prices?

  • Gogas, Periklis

    ()

    (Democritus University of Thrace, Department of International Economic Relations and Development)

  • Pragidis, Ioannis

    ()

    (Democritus University of Thrace, Department of International Economic Relations and Development)

In this paper we examine the predictability power of long term risk premium over Housing prices in U.S.A. of a period of 19 years (1991-2009). For reasons that are cited clearly in the text, the interest rate risk premium is preferred over yield curve. Under a probit framework, it is tested whether recent housing pricing bust could have been predicted. We employ adaptive expectations for the formation of the agents’ short-term interest rate expectations. The ability to forecast such price changes is of great importance to investors and analysts of the housing market and for the design of financial institutions’ mortgage policy in a more prudential path.

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Paper provided by Democritus University of Thrace, Department of Economics in its series DUTH Research Papers in Economics with number 1-2010.

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Length: 15 pages
Date of creation: 26 Jan 2010
Date of revision:
Handle: RePEc:ris:duthrp:2010_001
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