Explosive Dynamics in House Prices? An Exploration of Financial Market Spillovers in Housing Markets Around the World

Valerie Grossman and Enrique Martínez García ()

No 342, Globalization Institute Working Papers from Federal Reserve Bank of Dallas

Abstract: Asset prices in general, and real house prices in particular, are often characterized by a nonlinear data-generating process which displays mildly explosive behavior in some periods. Here, we investigate the emergence of explosiveness in the dynamics of real house prices and the role played by asset market spillovers. We establish a timeline of periodically-collapsing episodes of explosiveness for a panel of 23 countries from the Federal Reserve Bank of Dallas? International House Price Database (Mack and Martnez-Garca (2011)) between first quarter 1975 and fourth quarter 2015 using the recursive unit root test methodology proposed by Phillips et al. (2015a,b). Motivated by the theory of financial arbitrage, we examine within a dynamic panel logit/probit framework whether macro fundamentals?and, more specifically, financial variables?help predict episodes of explosiveness in real house prices. We find that interest rate spreads and real stock market growth together with standard macro variables (growth in personal disposable income per capita and inflation) are amongst the best predictors. We, therefore, argue that financial developments in other asset markets play a significant role in the emergence of explosiveness in housing markets.

Keywords: Financial Spillovers; Mildly Explosive Time Series; Right-Tailed Unit-Root Tests; Dynamic Panel Logit Model; International Housing Markets (search for similar items in EconPapers)
JEL-codes: C22 G12 R30 R31 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2018-07-01
New Economics Papers: this item is included in nep-cse and nep-ets
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Explosive dynamics in house prices? An exploration of financial market spillovers in housing markets around the world (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:feddgw:342

DOI: 10.24149/gwp342r1

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