Frictionless house-price momentum

Patrick Fève and Alban Moura

No 177, BCL working papers from Central Bank of Luxembourg

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.

Keywords: house prices; momentum; AR(2) process; rational expectations; news shocks. (search for similar items in EconPapers)
JEL-codes: C32 E32 G12 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2023-11
New Economics Papers: this item is included in nep-ure
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https://www.bcl.lu/en/publications/Working-papers/177/BCLWP177.pdf (application/pdf)

Related works:
Journal Article: Frictionless house-price momentum (2024)
Working Paper: Frictionless house-price momentum (2024)
Working Paper: Frictionless house-price momentum (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:bcl:bclwop:bclwp177

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