Losing Track of the Asset Markets : the Case of Housing and Stock

Research output: Journal Publications and ReviewsRGC 21 - Publication in refereed journalpeer-review

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Detail(s)

Original languageEnglish
Pages (from-to)435-492
Journal / PublicationInternational Real Estate Review
Volume19
Issue number4
Publication statusPublished - Dec 2016

Abstract

This paper revisits the relationships among macroeconomic variables and asset returns. Based on recent developments in econometrics, we categorize competing models of asset returns into different "Equivalence Predictive Power Classes" (EPPCs). During the pre-crisis period (1975-2005), some models emphasize that imperfect capital markets outperform an AR(1) for the forecast of housing returns. After 2006, a model that includes both an external finance premium (EFP) and the TED spread "learns and adjusts" faster than competing models. Models that encompass GDP experience a significant decay in predictive power. We also demonstrate that a simulation-based approach is complementary to the EPPC methodology.

Research Area(s)

  • Monetary Policy, Financial Market Variables, Univariate Benchmark for A Single-regime (USB), Markov Regime Switching, Forecasting