Time-Varying Correlation in Housing Prices

Time-Varying Correlation in Housing Prices In the wake of the housing crisis, credit rating agencies have received much blame, particularly for the statistical tools they used to measure correlations in housing prices in different locations. Several studies have proposed alternative statistical models, but to date, all such approaches assume that correlations remain constant over time. This paper argues that, regardless of the correlation patterns built into such statistical models, correlations might strengthen during times of financial turmoil. Consequently, mortgage-backed securities might have been appropriately diversified during “ normal” times, but less so during extreme market swings. Using monthly data on housing prices in four major U.S. cities, the main findings confirm that housing prices do, indeed, exhibit correlations that change over time, and more importantly, those correlations appear to strengthen in the midst of market turmoil. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Real Estate Finance and Economics Springer Journals

Time-Varying Correlation in Housing Prices

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Publisher
Springer US
Copyright
Copyright © 2014 by Springer Science+Business Media New York
Subject
Economics / Management Science; Regional/Spatial Science; Finance/Investment/Banking
ISSN
0895-5638
eISSN
1573-045X
D.O.I.
10.1007/s11146-014-9475-y
Publisher site
See Article on Publisher Site

Abstract

In the wake of the housing crisis, credit rating agencies have received much blame, particularly for the statistical tools they used to measure correlations in housing prices in different locations. Several studies have proposed alternative statistical models, but to date, all such approaches assume that correlations remain constant over time. This paper argues that, regardless of the correlation patterns built into such statistical models, correlations might strengthen during times of financial turmoil. Consequently, mortgage-backed securities might have been appropriately diversified during “ normal” times, but less so during extreme market swings. Using monthly data on housing prices in four major U.S. cities, the main findings confirm that housing prices do, indeed, exhibit correlations that change over time, and more importantly, those correlations appear to strengthen in the midst of market turmoil.

Journal

The Journal of Real Estate Finance and EconomicsSpringer Journals

Published: Jul 2, 2014

References

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