The probability and timing of price reversals in the property market

Graham Partington and Max Stevenson
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Graham Partington: University of Technology Sydney, Lindfield, NSW, Australia, Postal: University of Technology Sydney, Lindfield, NSW, Australia
Max Stevenson: University of Technology Sydney, Lindfield, NSW, Australia, Postal: University of Technology Sydney, Lindfield, NSW, Australia

Managerial and Decision Economics, 2001, vol. 22, issue 7, 389-398

Abstract: In this paper, we develop models for estimating the time varying probability that there will be a price reversal in the property market. Knowledge of such price reversals may be helpful in forming property trading strategies, and providing confirming evidence of turning points in property cycles. Using an index from the UK property market, we obtain the time varying probabilities by estimating state transition rates. State transition rates are estimated for cases where the up-state (a run of positive price changes) switches to the down-state (price falls) and vice versa. We also estimate a model for absolute transitions, where we take no account of the direction of the state transition. The predictive power of our models is assessed using data from a holdout period. We find that the absolute transition model performs worse than separate state transition models for the up-state and the down-state. For these latter models, the more rapid the decline in the forecast probability of a run continuing beyond a certain time, the less likely it is that the run will actually continue. Further, the probability profiles provide a perfect rank ordering of the length of runs in the holdout period. This suggests that the probabilities could be used to predict whether a sequence of price rises or falls will be long- or short-lived. Copyright © 2001 John Wiley & Sons, Ltd.

Date: 2001
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Persistent link: https://EconPapers.repec.org/RePEc:wly:mgtdec:v:22:y:2001:i:7:p:389-398

DOI: 10.1002/mde.1028

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