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Frictionless house-price momentum

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  • Fève, Patrick
  • Moura, Alban

Abstract

This paper establishes that frictionless, rational-expectations models driven by specific ARMA(2,1) processes can produce equilibrium asset-price momentum, defined as persistent movements in asset-price changes. To demonstrate this, we first document that AR(2) models adequately capture the dynamics observed in U.S. house prices, particularly the strong persistence of their first differences. Next, we show that ARMA(2,1) dividends can lead to equilibrium AR(2) asset-price dynamics within a simple present-value model. Our analytical approach provides an economic interpretation of the results, highlighting the role of anticipated shocks. Finally, we document the empirical plausibility of our theory by estimating the model using house-price data. Our analysis suggests that house-price momentum does not necessarily signal irrational exuberance or significant frictions in housing markets.

Suggested Citation

  • Fève, Patrick & Moura, Alban, 2024. "Frictionless house-price momentum," Journal of Economic Dynamics and Control, Elsevier, vol. 168(C).
    • Handle: RePEc:eee:dyncon:v:168:y:2024:i:c:s0165188924001921
    DOI: 10.1016/j.jedc.2024.105000
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    More about this item

    Keywords

    House prices; Momentum; AR(2) process; Rational expectations; News shocks;
    All these keywords.

    JEL classification:

    • 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
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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