Detecting periods of exuberance: A look at the role of aggregation with an application to house prices

Efthymios Pavlidis, Enrique Martínez-García and Valerie Grossman
Authors registered in the RePEc Author Service: Enrique Martínez García ()

Economic Modelling, 2019, vol. 80, issue C, 87-102

Abstract: The recently developed SADF and GSADF unit root tests of Phillips and Yu (2011) and Phillips et al. (2015a,b) have become popular in the literature for detecting exuberance in asset prices. In this paper, we examine through simulation experiments the effect of cross-sectional aggregation on the power properties of these tests. The simulation design considered is based on simulated data and actual housing data for both U.S. metropolitan areas and international housing markets and thus allows us to draw conclusions for different levels of aggregation. Our findings suggest that aggregation lowers the power of both the SADF and GSADF tests. The effect, however, is much larger for the SADF test. We also provide evidence that tests based on panel data techniques, namely the panel GSADF test recently proposed by Pavlidis et al. (2016), can perform substantially better than univariate tests applied to aggregated series. Furthermore, we also illustrate the date-stamping procedure under the univariate/panel GSADF procedure uncovering novel evidence on the role of interest rates and policy uncertainty as factors explaining episodes of widespread mildly explosive dynamics in housing markets.

Keywords: Aggregation; Mildly explosive time series; Right-tailed unit-root tests; Sup ADF (SADF) test; Generalized sup ADF (GSADF) test; House prices (search for similar items in EconPapers)
JEL-codes: C12 C22 G12 R30 (search for similar items in EconPapers)
Date: 2019
References: Add references at CitEc
Citations: View citations in EconPapers (11)

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Related works:
Working Paper: Detecting Periods of Exuberance: A Look at the Role of Aggregation with an Application to House Prices (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:80:y:2019:i:c:p:87-102

DOI: 10.1016/j.econmod.2018.07.021

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