Bubbling Up? What Consumer Expectations Reveal About U.S. Housing Market Exuberance, Federal Reserve Bank of Dallas, Working Paper 2521 - with Enrique Martinez-Garcia. Abstract: We investigate the presence of speculative bubbles in the U.S. housing market after the global financial crisis. Unlike standard approaches that rely on observed economic fundamentals, our method leverages subjective price expectations from the University of Michigan Survey of Consumers to test for exuberance without imposing a specific model of intrinsic housing values. By applying recursive least-squares and quantile-based unit root tests to cumulative expectational errors, we uncover novel evidence of speculative dynamics at the aggregate level and across broad demographic and socioeconomic groups. A date-stamping exercise reveals widespread exuberance in the second half of the 2010s, which paused before the pandemic recession and resurfaced amid the subsequent housing boom in 2021. For the Covid-19 period, we document notable differences in the timing of exuberance between observed house prices and survey-based indicators---a finding that underscores the importance of controlling for fundamentals when identifying speculative behavior. A complementary analysis using the New York Fed’s Survey of Consumer Expectations corroborates the baseline results. Overall, our findings highlight the value of survey data for monitoring housing markets.
Drifting STAR: A Time-Varying Nonlinear Real Exchange Rate Analysis - with Nicos Pavlidis. Abstract: Nonlinear real exchange rate models are typically based on the assumption of time-invariant market frictions. In this paper, we propose a time-varying-parameter smooth transition autoregressive model that facilitates inference on the evolution of market frictions and real exchange rate volatility. Using a long-span monthly dataset on the dollar–sterling real exchange rate that covers more than two centuries, we estimate the model in a fully Bayesian framework via Hamiltonian Monte Carlo. Our results provide evidence of long swings in the degree of market frictions over time. Furthermore, we show that real exchange rate volatility has exhibited large and persistent movements. These movements can be partially attributed to changes in the exchange rate regime. Finally, a generalized impulse response analysis indicates that the speed of real exchange rate adjustment to shocks varies substantially across historical periods.
Sentimental Housing Markets - with Kostas Vasilopoulos. Abstract: We investigate the causal effect of consumer confidence on housing market dynamics in the United States. Following Lagerborg, Pappa, Ravn (2023), we adopt an external instrument approach that uses mass fatalities to identify exogenous variations in consumer confidence. Our findings indicate that adverse sentiment shocks can adversely affect housing demand with a strong and prolonged reduction in house prices and new houses sold. The deterioration of sentiment worsens homeownership conditions, causes a response of monetary policy, and exacerbates real consumption spending. In a counterfactual exercise, we restrict the response of housing market variables to sentiment shocks to zero to assess the importance of housing in the propagation of such shocks to the rest of the economy. We find that the effect becomes particularly important at horizons exceeding a year.
Bubbles and Crashes: A Tale of Quantiles, Journal of Time Series Analysis, Volume 46, pp. 884-907
Dynamic Linear Models with Adaptive Discounting, International Journal of Forecasting, Volume 39, Issue 4, 2023, pp. 1925-1944 - with A. Yusupova and N. Pavlidis
exuber: Recursive Right-Tailed Unit Root Testing with R, Journal of Statistical Software, Volume 103, Issue 10, 2022, pp. 1-26 - with K. Vasilopoulos and E. Martinez-Garcia
House Prices, (Un)Affordability and Systemic Risk, New Zealand Economic Papers, Volume 55, Issue 1, 2021, pp. 105-123 - with I. Paya and A. Skouralis.
Speculative Bubbles in Segmented Markets: Evidence from Chinese Cross-Listed Stocks, Journal of International Money and Finance, Volume 109, 2020, 102222 - with K. Vasilopoulos.
Detecting Periods of Exuberance: A Look at the Role of Aggregation with an Application to House Prices, Economic Modelling, Volume 80, 2019, pp. 87-102 - with E. Martinez-Garcia and V. Grossman
Modeling Changes in U.S. Monetary Policy with a Time-Varying Nonlinear Taylor Rule, Studies in Nonlinear Dynamics and Econometrics, Volume 22, Issue 5, 2018, pp. 1-16 - with A. Nguyen and D. A. Peel
Using Market Expectations to Test for Speculative Bubbles in the Crude Oil Market, Journal of Money, Credit and Banking, Volume 50, Number 5, 2018, pp. 833-856 - with Ivan Paya and David A. Peel
The Spurious Effect of ARCH Errors on Linearity Tests: A Theoretical Note and an Alternative Maximum Likelihood Approach, Studies in Nonlinear Dynamics and Econometrics, Volume 22, Issue 2, 2018, pp. 1-8 - with Mike Tsionas
A Nonlinear Analysis of the Real Exchange Rate-Consumption Relationship, Macroeconomic Dynamics, Volume 22, 2018, pp. 1825-1843 - with Ivan Paya and David
Testing for Speculative Bubbles using Spot and Forward Prices, International Economic Review, Volume 58, Number 4, 2017, pp. 1191-1226 - with Ivan Paya and David A. Peel
Episodes of Exuberance in Housing Markets: In Search of the Smoking Gun, Journal of Real Estate Finance and Economics, Volume 53, Issue 4, 2016, pp. 419-449 - with Alisa Yusupova, Ivan Paya, David A. Peel, Enrique Martinez-Garcia, Adrienne Mack, Valerie Grossman
Testing for Linear and Nonlinear Granger Causality in the Real Exchange Rate Consumption Relation, Economics Letters, Volume 132, 2015, pp. 13-17 - with Ivan Paya and David A. Peel
Nonlinear Causality Tests and Multivariate Conditional Heteroskedasticity: A Simulation Study, Studies in Nonlinear Dynamics and Econometrics, Volume 17, Issue 3, pp. 297-312. - with Ivan Paya and David A. Peel
Nonlinear Dynamics in Economics and Finance, and Unit Root Testing, European Journal of Finance, Volume 19, Issue 6, pp. 572-588 - with Ivan Paya and David Peel
Forecast Evaluation of Nonlinear Models: The Case of Long-Span Real Exchange Rates, Journal of Forecasting, Volume 31, Issue 7, pp. 580-595 - with Ivan Paya and David A. Peel
Real Exchange Rates and Time-varying Trade Costs, Journal of International Money and Finance, Volume 30 (2011), Issue 6, pp. 1157-1179 . - with Ivan Paya and David A. Peel
Specifying Smooth Transition Regression Models in the Presence of Conditional Heteroskedasticity of Unknown Form, Studies in Nonlinear Dynamics and Econometrics, Volume 14 (2010), Issue 3. - with Ivan Paya and David A. Peel
The Econometrics of Exchange Rates, In Palgrave Handbook of Econometrics, Volume 2: Applied Econometrics, (eds.) K. Patterson and T.C. Mills, Palgrave Macmillan, 2009, pp. 1025-1086. - with Ivan Paya and David A. Peel
Testing Significance of Variables in Regression Analysis When There is Non-Normality or Heteroskedasticity: The Wild Bootstrap and the Generalized Lambda Distribution, In Advances in Doctoral Research in Management, Volume 2, (eds) Moutinho L. and Huarng K-H, World Scientic, 2008, pp. 151-174. -with Ivan Paya and David A. Peel
Handbook of Economic Forecasting, Volume 2A, Graham Elliot and Allan Timmerman, eds., International Journal of Forecasting, 2016, Volume 32, p. 895.
Computational Intelligence Algorithms for Risk-Adjusted Trading Strategies, In IEEE Congress on Evolutionary Computation (CEC), (eds) Dipti Srinivasan and Lipo Wang, 2007, Singapore. - with Nicos G. Pavlidis, Michael G. Epitropakis, Vassilis P. Plagianakos and Michael N. Vrahatis.