Frictionless house-price momentum

Patrick Fève () and Alban Moura
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Patrick Fève: TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement

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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)
Date: 2024-11
Note: View the original document on HAL open archive server: https://hal.science/hal-04810404v1
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Published in Journal of Economic Dynamics and Control, 2024, 168, pp.105000. ⟨10.1016/j.jedc.2024.105000⟩

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Related works:
Journal Article: 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:hal:journl:hal-04810404

DOI: 10.1016/j.jedc.2024.105000

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