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Sentiment Shock and Housing Prices: Evidence from Korea

Dong-Jin Pyo

KDI Journal of Economic Policy, 2022, vol. 44, issue 4, 79-108

Abstract: This study examines the impact of sentiment shock, which is defined as a stochastic innovation to the Housing Market Confidence Index (HMCI) that is orthogonal to past housing price changes, on aggregate housing price changes and housing price volatility. This paper documents empirical evidence that sentiment shock has a statistically significant relationship with Korea's aggregate housing price changes. Specifically, the key findings show that an increase in sentiment shock predicts a rise in the aggregate housing price and a drop in its volatility at the national level. For the Seoul Metropolitan Region (SMR), this study also suggests that sentiment shock is positively associated with one-month-ahead aggregate housing price changes, whereas an increase in sentiment volatility tends to increase housing price volatility as well. In addition, the out-of-sample forecasting exercises conducted here reveal that the prediction model endowed with sentiment shock and sentiment volatility outperforms other competing prediction models.

Keywords: Sentiment; Housing Price; Out-of-sample Forecasts; Seemingly Unrelated Regression (search for similar items in EconPapers)
JEL-codes: G12 R30 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:kdijep:267887

DOI: 10.23895/kdijep.2022.44.4.79

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