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Frictionless house-price momentum

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  • 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
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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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