Clustering in U.K. Home Price Volatility

Abstract

In the wake of the 2007–09 global financial crisis, there has been heightened interest incorrectly gauging the probability of large losses on assets, particularly house prices. If anasset exhibits GARCH effects in its returns, there is a much higher probability of largelosses during volatile periods than standard mean-variance analysis indicates. While therehas been much research on regional home prices in the United Kingdom, the focus hasbeen on the conditional mean and convergence rather than on the possibility of GARCHeffects and volatility clustering. The findings of this study reveal that the majority of U.K.regions indeed exhibit GARCH effects, and these GARCH effects have heterogeneousimpacts on returns across regions. The existence of these GARCH effects in the majorityof the U.K. regions has many important implications, ranging from proper portfoliomanagement to government policy.