IDEAS home Printed from https://ideas.repec.org/p/bcl/bclwop/bclwp177.html
   My bibliography  Save this paper

Frictionless house-price momentum

Author

Listed:
  • Patrick Fève
  • Alban Moura

Abstract

This paper establishes that frictionless, rational-expectations models driven by specific ARMA(2,1) forcing processes are consistent with equilibrium asset-price dynamics featuring momentum. To reach this result, we first document that AR(2) models adequately capture the cyclical dynamics found in U.S. house prices, in particular the strong positive first-order autocorrelation in their first difference. Then, we show analytically that ARMA(2,1) exogenous drivers give rise to equilibrium AR(2) asset-price dynamics in a simple present-value model. Our pen-and-paper approach yields a straightforward economic interpretation of the results, emphasizing the contribution of anticipated shocks to generating asset-price momentum. We document the empirical relevance of our theoretical results by estimating the model from house-price data. Our findings suggest that house-price momentum does not necessarily signal irrational exuberance or strong frictions in housing markets.

Suggested Citation

  • Patrick Fève & Alban Moura, 2023. "Frictionless house-price momentum," BCL working papers 177, Central Bank of Luxembourg.
    • Handle: RePEc:bcl:bclwop:bclwp177
    as

    Download full text from publisher

    File URL: https://www.bcl.lu/en/publications/Working-papers/177/BCLWP177.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Cindy K Soo, 2018. "Quantifying Sentiment with News Media across Local Housing Markets," The Review of Financial Studies, Society for Financial Studies, vol. 31(10), pages 3689-3719.
    2. Glaeser, Edward L. & Nathanson, Charles G., 2017. "An extrapolative model of house price dynamics," Journal of Financial Economics, Elsevier, vol. 126(1), pages 147-170.
    3. Paolo Gelain & Kevin J. Lansing & Caterina Mendicino, 2013. "House Prices, Credit Growth, and Excess Volatility: Implications for Monetary and Macroprudential Policy," International Journal of Central Banking, International Journal of Central Banking, vol. 9(2), pages 219-276, June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Bekiros, Stelios & Nilavongse, Rachatar & Uddin, Gazi Salah, 2020. "Expectation-driven house prices and debt defaults: The effectiveness of monetary and macroprudential policies," Journal of Financial Stability, Elsevier, vol. 49(C).
    2. Theresa Kuchler & Monika Piazzesi & Johannes Stroebel, 2022. "Housing Market Expectations," CESifo Working Paper Series 9665, CESifo.
    3. Alessia De Stefani, 2021. "House price history, biased expectations, and credit cycles: The role of housing investors," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 49(4), pages 1238-1266, December.
    4. Zhenyu Gao & Michael Sockin & Wei Xiong, 2020. "Learning about the Neighborhood," NBER Working Papers 26907, National Bureau of Economic Research, Inc.
    5. Chi-Young Choi & Alexander Chudik & Aaron Smallwood, 2024. "Time-varying Persistence of House Price Growth: The Role of Expectations and Credit Supply," Globalization Institute Working Papers 426, Federal Reserve Bank of Dallas.
    6. Paolo Gelain & Kevin J. Lansing & Gisle J. Natvik, 2018. "Explaining the Boom–Bust Cycle in the U.S. Housing Market: A Reverse‐Engineering Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 50(8), pages 1751-1783, December.
    7. Hjalmarsson, Erik & Österholm, Pär, 2020. "Heterogeneity in households’ expectations of housing prices – evidence from micro data," Journal of Housing Economics, Elsevier, vol. 50(C).
    8. Klaus Adam & Oliver Pfäuti & Timo Reinelt, 2020. "Falling Natural Rates, Rising Housing Volatility and the Optimal Inflation Target," CRC TR 224 Discussion Paper Series crctr224_2020_235, University of Bonn and University of Mannheim, Germany.
    9. Lasse Bork & Stig V. Møller & Thomas Q. Pedersen, 2020. "A New Index of Housing Sentiment," Management Science, INFORMS, vol. 66(4), pages 1563-1583, April.
    10. Zhenyu Gao & Michael Sockin & Wei Xiong, 2019. "Economic Consequences of Housing Speculation," NBER Working Papers 26457, National Bureau of Economic Research, Inc.
    11. Fang, Yi & Wang, Qi & Wang, Yanru & Yuan, Yan, 2024. "Media sentiment, deposit stability and bank systemic risk: Evidence from China," International Review of Economics & Finance, Elsevier, vol. 91(C), pages 1150-1172.
    12. Jose Carreno, 2020. "Housing Booms and the U.S. Productivity Puzzle," Working Papers 20-4, Center for Economic Studies, U.S. Census Bureau.
    13. Kuang, Pei, 2014. "A model of housing and credit cycles with imperfect market knowledge," European Economic Review, Elsevier, vol. 70(C), pages 419-437.
    14. Liu, Qing & Wang, Shouyang & Sui, Cong, 2023. "Risk appetite and option prices: Evidence from the Chinese SSE50 options market," International Review of Financial Analysis, Elsevier, vol. 86(C).
    15. Duffy, David & Mc Inerney, Niall & McQuinn, Kieran, 2015. "Macroprudential Policy in a Recovering Market: Too Much too Soon?," Papers WP500, Economic and Social Research Institute (ESRI).
    16. Crowe, Christopher & Dell’Ariccia, Giovanni & Igan, Deniz & Rabanal, Pau, 2013. "How to deal with real estate booms: Lessons from country experiences," Journal of Financial Stability, Elsevier, vol. 9(3), pages 300-319.
    17. Rose Neng Lai & Robert Van Order, 2019. "Shadow Banking and the Property Market in China," International Real Estate Review, Global Social Science Institute, vol. 22(3), pages 359-397.
    18. Jean-Charles Bricongne & Baptiste Meunier & Raquel Caldeira, 2024. "Should Central Banks Care About Text Mining? A Literature Review," Working papers 950, Banque de France.
    19. Greg Howard & Carl Liebersohn, 2019. "What Explains U.S. House Prices? Regional Income Divergence," 2019 Meeting Papers 1054, Society for Economic Dynamics.
    20. Begley, Jaclene & Chan, Sewin, 2018. "The effect of housing wealth shocks on work and retirement decisions," Regional Science and Urban Economics, Elsevier, vol. 73(C), pages 180-195.

    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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bcl:bclwop:bclwp177. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/bclgvlu.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.