An in-sample and out-of-sample empirical investigation of the nonlinearity in house prices of South Africa
Rangan Gupta and
Zahra B. Shah
Economic Modelling, 2011, vol. 28, issue 3, 891-899
This paper tests whether housing prices in the five segments of the South African housing market, namely large-middle, medium-middle, small-middle, luxury and affordable, exhibit non-linearity based on smooth transition autoregressive (STAR) models estimated using quarterly data from 1970:Q2 to 2009:Q3. Findings point to an overwhelming evidence of non-linearity in these five segments based on in-sample evaluation of the linear and non-linear models. We next provide further support for non-linearity by comparing one- to four-quarters-ahead out-of-sample forecasts of the non-linear time series model with those of the classical and Bayesian versions of the linear autoregressive (AR) models for each of these segments, for the out-of-sample horizon 2001:Q1 to 2009:Q3, using the in-sample period 1970:Q2 to 2000:Q4. Our results indicate that barring the one-, two and four-step(s)-ahead forecasts of the small segment, the non-linear model always outperforms the linear models. In addition, given the existence of strong causal relationship amongst the house prices of the five segments, the multivariate versions of the linear (classical and Bayesian) and STAR (MSTAR) models were also estimated. The MSTAR always outperformed the best performing univariate and multivariate linear models. Thus, our results highlight the importance of accounting for non-linearity, as well as the possible interrelationship amongst the variables under consideration, especially for forecasting.
Keywords: Bayesian; autoregressive; models; Housing; market; Smooth; transition; autoregressive; models; Forecast; accuracy (search for similar items in EconPapers)
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Working Paper: An In-Sample and Out-of-Sample Empirical Investigation of the Nonlinearity in House Prices of South Africa (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:28:y:2011:i:3:p:891-899
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