Abstract
This paper establishes that frictionless, rational-expectations models driven by specific ARMA(2,1) forcing processes are consistent with equilibrium asset-price dynamics featuring momentum. To reach this result, we first document that AR(2) models adequately capture the cyclical dynamics found in U.S. house prices, in particular the strong positive first-order autocorrelation in their first difference. Then, we show analytically that ARMA(2,1) exogenous drivers give rise to equilibrium AR(2) asset-price dynamics in a simple present-value model. Our pen-and-paper approach yields a straightforward economic interpretation of the results, emphasizing the contribution of anticipated shocks to generating asset-price momentum. We document the empirical relevance of our theoretical results by estimating the model from house-price data. Our findings suggest that house-price momentum does not necessarily signal irrational exuberance or strong frictions in housing markets.
Keywords
house prices; momentum; AR(2) process; rational expectations; news shocks;
JEL codes
- C32: Time-Series Models • Dynamic Quantile Regressions • Dynamic Treatment Effect Models • Diffusion Processes
- E32: Business Fluctuations • Cycles
- G12: Asset Pricing • Trading Volume • Bond Interest Rates
Reference
Patrick Fève, and Alban Moura, “Frictionless house-price momentum”, TSE Working Paper, n. 23-1488, November 2023.
See also
Published in
TSE Working Paper, n. 23-1488, November 2023