Short-Term Expectation Formation Versus Long-Term Equilibrium Conditions: The Danish Housing Market
Andreas Hetland () and
Simon Hetland ()
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Andreas Hetland: Department of Economics, University of Copenhagen, 1353 Copenhagen K, Denmark
Simon Hetland: Department of Economics, University of Copenhagen, 1353 Copenhagen K, Denmark
Econometrics, 2017, vol. 5, issue 3, 1-21
The primary contribution of this paper is to establish that the long-swings behavior observed in the market price of Danish housing since the 1970s can be understood by studying the interplay between short-term expectation formation and long-run equilibrium conditions. We introduce an asset market model for housing based on uncertainty rather than risk, which under mild assumptions allows for other forms of forecasting behavior than rational expectations. We test the theory via an I (2) cointegrated VAR model and find that the long-run equilibrium for the housing price corresponds closely to the predictions from the theoretical framework. Additionally, we corroborate previous findings that housing markets are well characterized by short-term momentum forecasting behavior. Our conclusions have wider relevance, since housing prices play a role in the wider Danish economy, and other developed economies, through wealth effects.
Keywords: asset pricing; cointegration; I (2) analysis; housing market; imperfect knowledge; Knightian uncertainty; long swings (search for similar items in EconPapers)
JEL-codes: B23 C C00 C01 C1 C2 C3 C4 C5 C8 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:gam:jecnmx:v:5:y:2017:i:3:p:40-:d:110779
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