House price dynamics, conditional higher-order moments, and density forecasts

Kuang-Liang Chang

Economic Modelling, 2010, vol. 27, issue 5, 1029-1039

Abstract: Most studies on housing price dynamics are only concerned with the conditional mean and variance, but overlook other higher-order conditional moments and the structural change characteristics inherent in housing prices. In order to take into account these two important issues, this study utilizes the generalized Markov switching GARCH model to explore house price dynamics and conditional distribution for US market over 1975Q1-2007Q4. The housing return follows two distinct dynamics: the bust regime and the boom regime. The volatility pattern is different in the bust and boom regimes. In addition, the conditional densities derived by the regime-switching model change dramatically over time and are significantly different from normal distribution. More importantly, the regime-switching model can detect in advance a weak US housing market such as the one that occurred in the middle of 2007. The in-sample fitting ability of regime-switching model, which incorporates higher-order moments, has significant improvements compared to the single-regime AR and AR-GARCH models. For the out-of-sample Value-at-Risk forecasting performance, the ability of regime-switching AR-GARCH model to forecast one-step-ahead density is better compared to the single-regime AR-GARCH model.

Keywords: House; price; dynamics; Markov; regime-switching; GARCH; model; Conditional; distribution; Density; forecasting (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (3)

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