Modelling house price volatility states in the UK by switching ARCH models

Abstract

This article analyses investment risk in the housing market by examining volatility properties of house prices for the UK. We use both ARCH and GARCH models to estimate price conditional heteroscedasticity and find evidence of a time-varying property in the volatilities of the house price series. We then use the SWARCH model and find there are three volatility states in the price series. Our estimations suggest the UK housing markets are relatively stable and different states do not switch very often. The magnitude of high price volatility is as high as 20.99 times of the low volatility for the older housing market and 14 times of the low volatility for the new housing market. In addition, the older housing market is less efficient than the new housing market, since the impacts of events on the volatility state of the older house prices is more lasting than in new housing market.

The dynamic correlation and volatility of real estate price and rental: an application of MSV model

“…These results imply that the real estate market is sensitive to the external shocks such as policy change and overall economic situation. Second, although the volatile behaviour in housing price has been well documented by several previous studies (Dolde and Tirtitoglu, 2002;Tsai et al, 2010), our results can shed some new light on capturing the volatilities in the real estate prices and extend them to different types of specific sub-markets. The volatilities of price returns are significantly larger than those of rental returns for each type of real estate markets throughout the whole sample period, and the volatilities of price returns seem much more fluctuant compared with those of rental returns.…”

“…The ARCH/GARCH methodologies by Bollerslev (1986) and Engle (1982), as well as the SV model (Taylor, 1994), attempt to simulate this empirical phenomenon in financial markets. Indeed, the Univariate Stochastic Volatility (USV) models and ARCH-type models use alternatively in accounting for both conditional and unconditional properties of volatility (Kim et al, 1998;Shephard, 2004;Gerlach and Tuyl, 2006;Hossain and Latif, 2009;Tsai et al, 2010).…”

Modelling UK House Prices with Structural Breaks and Conditional Variance Analysis

“…Furthermore, even though recently there has been an increased interest in studies of multivariate analyses of house prices in the US (Miao et al 2011;Antonakakis et al 2015;Damianov and Escobari 2016), and although the dynamics of the UK housing prices have been extensively studied in the literature over the last decade, with studies of regional house prices in the UK including those of Stevenson et al (2007), Tsai et al (2010), Willcocks (2010), Miles (2011b), and Thomas (2011, 2016), multivariate analyses of UK house prices are very limited. To the best of the authors' knowledge, only Willcocks (2010) considered studying the UK house prices on a multivariate basis.…”

Asset prices regime-switching and the role of inflation targeting monetary policy

“…The view that housing prices switch between regimes of different degrees of volatility has been suggested by authors such as Hall et al (1997) and Tsai et al (2010). More specifically, Hall et al (1997) argued that highly volatile and unstable regimes could provide fertile ground for the development of bubbles in the UK housing market.…”