A simple open economy asset pricing model can account for the house price and current account dynamics in the G7 over the years [2001][2002][2003][2004][2005][2006][2007][2008]. The model features rational households, but assumes that households entertain subjective beliefs about price behavior and update these using Bayes' rule. The resulting beliefs dynamics considerably propagate economic shocks and crucially contribute to replicating the empirical evidence. Belief dynamics can temporarily delink house prices from fundamentals, so that low interest rates can fuel a house price boom. House price booms, however, are not necessarily synchronized across countries and the model correctly predicts the heterogeneous response of house prices across the G7, following the fall in real interest rates at the beginning of the millennium. The response to interest rates depends sensitively on agents' beliefs at the time of the interest rate reduction, which are a function of the prior history of disturbances hitting the economy. According to the model, the US house price boom could have been largely avoided, if real interest rates had decreased by less after the year 2000.JEL Classifications: F41, F32, E43
We conduct an extensive examination of profitability of technical analysis in ten emerging foreign exchange markets. Studying 25988 trading strategies for emerging foreign exchange markets, we find that best rules can sometimes generate an annually mean excess return of more than 30%. Based on standard tests, we find hundreds to thousands of seemingly significant profitable strategies. Almost all these profits vanish once the data snooping bias is taken into account. Overall, we show that the profitability of technical analysis is illusory.
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The paper presents a model of housing and credit cycles featuring distorted beliefs and comovement and mutual reinforcement between house price expectations and price developments via credit expansion/contraction. Positive (negative) development in house prices fuels optimism (pessimism) and credit expansion (contraction), which in turn boost (dampen) housing demand and house prices and reinforce agents'optimism (pessimism). Bayesian learning about house prices can endogenously generate selfreinforcing booms and busts in house prices and signi…cantly strengthen the role of collateral constraints in aggregate ‡uctuations. The model can quantitatively account for the 2001-2008 U.S. boom-bust cycle in house prices and associated household debt and consumption dynamics. It also demonstrates that allowing for imperfect knowledge of agents, a higher leveraged economy is more prone to self-reinforcing ‡uctuations.
Observed macroeconomic forecasts display gradual recognition of the long-run growth of endogenous variables (e.g. output, output per hour) and a positive correlation between long-run growth expectations and cyclical activities. Existing business cycle models appear inconsistent with the evidence. This paper presents a model of business cycle in which households have imperfect knowledge of the long-run growth of endogenous variables and continually learn about this growth. The model features comovement and mutual in ‡uence of households'growth expectations and market outcomes, which can replicate the evidence, and suggests a critical role for shifting long-run growth expectations in business cycle ‡uctuations.
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