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Covariance Risk and the Ripple Effect in the UK Regional Housing Market

Author

Listed:
  • Bruce Morley

    (Department of Economics, University of Bath, Bath, BA2 7AY, UK)

  • Dennis Thomas

    (Aberystwyth Business School, Aberystwyth University, Aberystwyth, SY23 3AL, UK)

Abstract

This study combines two increasingly popular areas of the housing literature, by incorporating a measure of the ripple effect into a model of house price volatility. Using UK data for the English regions and Wales from 1995 to 2016, a multivariate GARCH model is initially used to produce time-varying covariances between house prices in London and other regions. These covariances are then incorporated into an EGARCH model of house price volatility showing that this covariance term is highly significant and positively signed in all regions, such that an increase in the covariance with London has a positive effect on a region¡¯s house prices. However the GARCH term in the mean equation produces a negative risk/return relationship across regional housing markets, although it is not robust to different specifications. This suggests that in the UK, when treating regional housing market risk, policies need to include the relationship of the region¡¯s house prices with those of London. Similar considerations could also apply in other countries exhibiting ripple effects in their housing markets.

Suggested Citation

  • Bruce Morley & Dennis Thomas, 2018. "Covariance Risk and the Ripple Effect in the UK Regional Housing Market," Review of Economics & Finance, Better Advances Press, Canada, vol. 13, pages 1-13, August.
    • Handle: RePEc:bap:journl:180301
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    More about this item

    Keywords

    Covariance risk; Ripple effect; EGARCH; Housing;
    All these keywords.

    JEL classification:

    • R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - General
    • R11 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Regional Economic Activity: Growth, Development, Environmental Issues, and Changes
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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