Testing for regime-switching behaviour in Finnish agricultural land prices

Juho Valtiala

doi:10.1108/afr-03-2020-0037

Abstract

PurposeThis study analyses agricultural land price dynamics in order to better understand price development and to improve forecast accuracy. Understanding the evolution of agricultural land prices is important when considering sound investment decisions.Design/methodology/approachThis study applies threshold autoregression to model agricultural land prices. The data includes quarterly observations on Finnish agricultural land prices.FindingsThe study shows that Finnish agricultural land prices exhibit regime-switching behaviour when using past changes in prices as a threshold variable. The threshold autoregressive model not only fits the data better but also improves the accuracy of price forecasts compared to the linear autoregressive model.Originality/valueThe results show that a sharp fall in agricultural land prices temporarily changes the regular development of prices. This information significantly improves the accuracy of price predictions.

Highlights

Concerns such as excessive speculative pricing and land grabbing in agricultural land markets have been recently discussed in the European Union (European Commission, 2017)
Featherstone et al (2017) found that Kansas land values slowly adjust to changes in farm income, but they fully respond to the changes in income in the long term
The autocorrelation function (ACF) and the results from unit-root tests indicate the presence of a unit root in the agricultural land price series

Summary

Introduction

Concerns such as excessive speculative pricing and land grabbing in agricultural land markets have been recently discussed in the European Union (European Commission, 2017) These concerns relate to the long-lasted discussion about the determination of agricultural land prices amongst economists. Moss and Katchova (2005) concluded, on the other hand, that agricultural land appears to be consistently over-priced, it consistently follows the changes in fundamental values. In line with this conclusion, Shi and McCarthy (2013) found that there has been a correspondence between agricultural land price and land rental

Objectives

Methods

Results

Conclusion