INFORMATION CONTENT OF TRANSACTION VOLUME: THE HOUSING MARKET IN THE UNITED KINGDOM

I-Chun Tsai

doi:10.3846/ijspm.2018.5219

Abstract

According to search theory, transaction volume possesses the function of price discovery and reflects information more rapidly than price does. However, the findings of previous empirical studies differ considerably. In this study, a theoretical model is first established to analyze the potential information lag of transaction volume during pessimistic speculation. Data on the UK housing market are collected to conduct an empirical analysis of the responses of housing transaction volume to different market conditions. The results show that transaction volume responds to market information more quickly than does housing prices. However, under increasing market uncertainty, transaction volume lags four periods before reflecting the effect of the uncertainty. Moreover, this study performs a rolling window bootstrap Granger causality test, revealing that price leads volume during the period in which transaction volume fails to reflect an immediate rise in market uncertainty. An increase in market uncertainty reduces transaction volume. In addition, once transaction volume drops below a specific threshold, it loses its information content and price discovery function, extending the lead-lag gap with housing prices by two periods. The present study proposes a simple method for determining the informative-ness of housing transaction volume.

Highlights

In contrast to the stock market, the price–volume relationship (PVR) of the housing market has yet to be fully explained
On the basis of previous theoretical research, we propose a simple integrated model that accounts for buyer and seller behaviors, loss aversion, and down payment restriction to validate that the informativeness of transaction volume only becomes inadequate when pessimistic speculation is present in the housing market, leading to a decrease in transaction volume
The data analyzed in the present study are the housing price indices (HPI) and the transaction volume data contained in the UK Land Registry Open Data

Summary

Introduction

In contrast to the stock market, the price–volume relationship (PVR) of the housing market has yet to be fully explained. Genesove and Mayer (2001) examine data on downtown Boston in the 1990s and report that traders in the housing market are irrational They verify the disposition effect in the housing market and determine that loss aversion determines seller behavior in the housing market; they conclude that housing price and transaction volume are significantly and positively correlated. On the basis of previous theoretical research, we propose a simple integrated model that accounts for buyer and seller behaviors, loss aversion, and down payment restriction to validate that the informativeness of transaction volume only becomes inadequate when pessimistic speculation is present in the housing market, leading to a decrease in transaction volume. The subsequent sections are organized as follows: Section 1 introduces the theoretical framework for explaining how the informativeness of transaction volume varies with market conditions; Section 2 discusses the research methods; Section 3 details the sample collection and empirical results; and the last section concludes this study

Theoretical model

Empirical methodology

Data and empirical results

Findings

Conclusions