Abstract
We present a simple model of the price process of a capital asset that is subject to serially correlated demand shocks, and whose supply responds with a lag. In this setting the price of the asset can exhibit positive serial correlation over short intervals and negative serial correlation over longer intervals. In an examination of the prices of owner-occupied housing in 97 metropolitan areas between 1980 and 2008, we find that price changes exhibit positive serial correlation at the one year interval, with subsequent reversals of price changes over longer intervals. In addition, consistent with the model, our tests indicate that the price process is influenced by proxies for the serial correlation in demand as well as the elasticity of the supply responses.
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