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The Spatial Heterogeneity of the Time-varying Impact of Shocks on Volatility: Some Evidence from MSA Housing Markets

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  • Geoffrey Ngene
  • Allen K. Lynch
  • Daniel P. Sohn

Abstract

Executive Summary. In this study, we investigate the time-varying response of conditional variance to endogenous and exogenous shocks. Using MSA-level monthly data spanning 31 years and two asymmetric volatility models, we find evidence of volatility clustering and the asymmetric effects of good and bad news on conditional variance. The conditional variances of “superstar” cities suggest that they strongly respond to good news but mildly respond to bad news. Conversely, the conditional variances of Southern and Midwestern cities in the U.S. respond strongly to bad news but marginally to good news. The evidence has important implications for the pricing of real estate derivatives and on the adoption of dynamic hedging strategies after major shocks.

Suggested Citation

  • Geoffrey Ngene & Allen K. Lynch & Daniel P. Sohn, 2019. "The Spatial Heterogeneity of the Time-varying Impact of Shocks on Volatility: Some Evidence from MSA Housing Markets," Journal of Real Estate Portfolio Management, Taylor & Francis Journals, vol. 25(1), pages 25-52, January.
    • Handle: RePEc:taf:repmxx:v:25:y:2019:i:1:p:25-52
    DOI: 10.1080/10835547.2019.12090022
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