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Behavioral heterogeneity in the Australian housing market

Wai-Mun Chia, Mengling Li and Huanhuan Zheng

Applied Economics, 2017, vol. 49, issue 9, 872-885

Abstract: We propose a heterogeneous agent model (HAM) of four groups of investors with Markov chain regime-dependent beliefs for the housing market. Within the Markov switching framework, we take into account how heterogeneous investors shift their trading behaviour in response to changes in housing market conditions. The model is estimated and compared with the benchmark rational expectation models using the Australian housing market data from 1982Q1 to 2013Q2. We find evidence of within- and between-group heterogeneity in the Australian housing market. We show that HAM with Markov switching beliefs provides a better in-sample estimation efficiency and outperforms the conventional rational expectation models in terms of out-of-sample prediction.

Date: 2017
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