TY - JOUR
T1 - Can a stochastic cusp catastrophe model explain housing market crashes?
AU - Diks, Cees
AU - Wang, Juanxi
PY - 2016/8/20
Y1 - 2016/8/20
N2 - Like stock market prices, housing prices often exhibit temporary booms and busts. A possible explanation for the observed abrupt changes is offered by the stochastic catastrophe model. This paper addresses the question whether the catastrophe model can describe and predict the dynamics of housing markets. We fit a stochastic cusp catastrophe model to empirical housing market data for six OECD countries, US, JP, UK, NL, SE and BE. Two different estimation approaches are considered - Cobb's method and Euler discretization. The analysis shows that while Cobb's approach describes the long-run stationary density better, Euler discretization is more tailored for time series, as it provides better one-step-ahead predictions. Proceeding using the Euler discretization method we discuss the dynamics of housing markets in terms of the multiple equilibria cusp catastrophe model. By considering the long-term interest rate as an exogenous variable we obtain new insights into the policy implications of interest rate levels, in particular concerning the stability of housing markets.
AB - Like stock market prices, housing prices often exhibit temporary booms and busts. A possible explanation for the observed abrupt changes is offered by the stochastic catastrophe model. This paper addresses the question whether the catastrophe model can describe and predict the dynamics of housing markets. We fit a stochastic cusp catastrophe model to empirical housing market data for six OECD countries, US, JP, UK, NL, SE and BE. Two different estimation approaches are considered - Cobb's method and Euler discretization. The analysis shows that while Cobb's approach describes the long-run stationary density better, Euler discretization is more tailored for time series, as it provides better one-step-ahead predictions. Proceeding using the Euler discretization method we discuss the dynamics of housing markets in terms of the multiple equilibria cusp catastrophe model. By considering the long-term interest rate as an exogenous variable we obtain new insights into the policy implications of interest rate levels, in particular concerning the stability of housing markets.
KW - housing market
KW - instability
KW - multiple equilibria
KW - stochastic catastrophe
UR - http://www.scopus.com/inward/record.url?scp=84971440046&partnerID=8YFLogxK
UR - http://www.sciencedirect.com/science/article/pii/S0165188916300690
U2 - 10.1016/j.jedc.2016.05.008
DO - 10.1016/j.jedc.2016.05.008
M3 - Article
AN - SCOPUS:84971440046
SN - 0165-1889
VL - 69
SP - 68
EP - 88
JO - Journal of Economic Dynamics and Control
JF - Journal of Economic Dynamics and Control
ER -