Abstract
The impact of volatility in housing market analysis is reconsidered via examinaton ofthe risk-return relationship in the London housing market is examined. In addition to providing thefirst empirical results for the relationship between risk (as measured by volatility) and returns forthis submarket, the analysis offers a more general message to empiricists via a detailed and explicitevaluation of the impact of empirical design decisions upon inferences. In particular, the negativerisk-return relationship discussed frequently in the housing market literature is examined and shown todepend upon typically overlooked decisions concerning components of the empirical framework fromwhich statistical inferences are drawn.
Highlights
IntroductionThe importance of the housing market to the wider economy has been well documented in empirical research with a number of studies noting, inter alia, its substantive contribution to private sector wealth, dominance over the stock market in determining household consumption decisions, central role within the macroeconomy and close relationship with economic fundamentals (Brueckner, 1997; Holly and Jones, 1997; Gallin, 2006; Goetzmann, 1993; Goodhart and Hoffman, 2007; Bayer et al, 2010; Costello et al, 2011; Case et al, 2013; Han, 2013)
The results obtained from estimation of the GARCH(1,1)-M and exponential GARCH (EGARCH)(1,1)-M models over the full sample are presented in Tables One and Two
Statistically significant estimated risk-return coefficients from static models δ0, obtained from Akaike Information Criterion (AIC) optimisation of the lag length δAIC and the maximum and minimum values obtained across alternative lag specifications δmax, δmin are provided to evaluate the impact of variations in dynamic specification (Di)
Summary
The importance of the housing market to the wider economy has been well documented in empirical research with a number of studies noting, inter alia, its substantive contribution to private sector wealth, dominance over the stock market in determining household consumption decisions, central role within the macroeconomy and close relationship with economic fundamentals (Brueckner, 1997; Holly and Jones, 1997; Gallin, 2006; Goetzmann, 1993; Goodhart and Hoffman, 2007; Bayer et al, 2010; Costello et al, 2011; Case et al, 2013; Han, 2013). A feature of this literature is the repeated discussion of the existence of a counterintuitive negative risk-return relationship within housing markets (Dolde and Tirtiroglu, 1997; Morley and Thomas, 2011; Han, 2013; Lin and Fuerst, 2014). The present research considers the influence of the components of empirical design upon the subsequent inferences drawn by investigators when examining the relationship between risk, as measured by volatility, and returns. It is examined how the significant negative relationship which has featured so prominently in the literature is dependent upon stances taken with regard to decisions on variable definition, sample selection, optimisation methods, dynamic specification, regional disaggregation and modelling techniques.
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