Frictionless house-price momentum

Patrick Fève and Alban Moura

Journal of Economic Dynamics and Control, 2024, vol. 168, issue C

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.

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)
Date: 2024
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Working Paper: Frictionless house-price momentum (2024)
Working Paper: Frictionless house-price momentum (2023)
Working Paper: Frictionless house-price momentum (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:168:y:2024:i:c:s0165188924001921

DOI: 10.1016/j.jedc.2024.105000

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