Reply to “Rational Bubbles in UK Housing Markets”

Econometrica ◽  
2020 ◽  
Vol 88 (4) ◽  
pp. 1767-1770
Author(s):  
Stefano Giglio ◽  
Matteo Maggiori ◽  
Johannes Stroebel
Keyword(s):  
Rational Expectation ◽  
Housing Markets ◽  
Backward Induction ◽  
Information Frictions ◽  
Rational Bubbles ◽  
Market Participants ◽  
Housing Assets

In Giglio, Maggiori, and Stroebel (2016), we propose and implement a new test for classic rational bubbles. Such bubbles derive their value from each agent's rational expectation of being able to resell the bubble claims to the next agent. Backward induction ensures that classic rational bubbles can only exist on infinite‐maturity assets. Our empirical exercise shows that infinite‐maturity claims and 999‐year claims for otherwise identical housing assets trade at the same price, and thus rules out the presence of classic rational bubbles. Domeij and Ellingsen (DE) informally propose an alternative equilibrium of a bubble that they claim is consistent with our empirical findings. DE's bubble relies on information frictions such that market participants are unaware of the bubble. Our paper clearly excluded this type of bubble from the scope of our test, and DE's note thus has no implications for the validity of our test. Instead, DE's bubble simply represents one of many possible examples of bubbles on which our test was explicitly silent.

scholarly journals Rational Bubbles in UK Housing Markets: Comment on “No‐Bubble Condition: Model‐Free Tests in Housing Markets”

Econometrica ◽  
2020 ◽  
Vol 88 (4) ◽  
pp. 1755-1766 ◽  
Author(s):  
David Domeij ◽  
Tore Ellingsen
Keyword(s):  
Housing Market ◽  
Rational Expectations ◽  
Housing Markets ◽  
Price Difference ◽  
Rational Bubbles ◽  
Market Participants ◽  
Condition Model ◽  
Model Free ◽  
The Uk ◽  
Counter Argument

Giglio, Maggiori, and Stroebel (2016) show that there is no significant price difference between freeholds and ultra‐long leaseholds in the UK housing market. They claim that this finding precludes the presence of large rational bubbles, as these can only attach to the price of freeholds. But the conclusion presumes that leaseholders cannot acquire bubbles through enfranchisement at favorable prices. We find that the presumption is violated. Enfranchisement rights are comprehensive and cheap to exercise. We also dispute the counter‐argument that cheap enfranchisement proves that market participants, if they have rational expectations, must have explicitly concluded that freehold prices are bubbleless.

Determinants of house buyers’ expected holding periods in boom and bust markets in California

2017 ◽  
Vol 10 (2) ◽  
pp. 256-281 ◽  
Author(s):  
Ekaterina Chernobai ◽  
Tarique Hossain
Keyword(s):  
Rational Expectation ◽  
House Price ◽  
Housing Markets ◽  
Real Estate Market ◽  
Disposition Effect ◽  
Content Type ◽  
Ex Post ◽  
Novel Approach ◽  
Ex Ante ◽  
Financial Characteristics

Purpose This study aims to investigate the determinants of homeowners’ planned holding periods. Real estate market is known for displaying buying and selling behavior that does not conform to traditional economic theories such as rational expectation or expected utility. Mounting evidence of anomalous observations appear to be supported by other theories, such as prospect theory, which in particular helps explain the disposition effect – sellers are too quick to sell when prices are climbing and hold on to properties longer when prices are plummeting. While this evidence is widely documented in housing studies based on data on realized holding periods (i.e. ex post), this study explores factors that may motivate homeowners to alter their expected holding horizons (i.e. ex ante) to form new preferred holding periods that may be shorter or longer than those planned during house search. Design/methodology/approach The empirical study uses data collected from two cross-section surveys of recent homebuyers in rising and declining housing markets in Southern California in 2004-2005 and 2007-2008, respectively. Findings The empirical results demonstrate that in addition to the financial characteristics of the recent homebuyer, the characteristics of the buying experience – non-monetary, such as the realized search duration, and monetary, such as perception of negative or positive premium paid for the house relative to its market value – have a statistically significant effect on the holding horizon revision. The data strongly indicate that the perception of having overpaid increases the likelihood of upward revision of the original holding horizon. This effect is stronger in the declining than in the rising market – a crucial finding that mirrors the disposition effect. Originality/value This study sheds new light on what may contribute to the disposition effect in housing markets that has not yet been investigated in past literature. The novel approach here is to look at how different house price environments may affect homeowners’ holding periods ex ante when they begin, rather than ex post when already realized.

The Spatial Structuring of Interurban Housing Markets: Application to Building Sites Prepared for Self-Provided Housing

10.1068/a4110 ◽  
2009 ◽  
Vol 41 (9) ◽  
pp. 2143-2161 ◽  
Author(s):  
Jean-Marie Halleux
Keyword(s):  
Academic Research ◽  
Housing Markets ◽  
Theoretical Framework ◽  
Market Outcomes ◽  
Cross Sectional ◽  
Market Participants ◽  
Two Factors ◽  
Modelling Methodology ◽  
Spatial Autoregressive ◽  
The Impact

The author supports the argument that a focus on the spatiality of economic mechanisms can be a valuable way to address the issue of interurban housing markets, a theme which has not yet been adequately addressed by academic research. Developments are based on a theoretical framework in which two factors are considered central to the structuring of markets: (i) the possibility of choice between substitutable supplies (spatially related to the territory prospected by the consumer), and (ii) the availability of information on the state of the market (spatially related to the use of local sales references when market participants prepare their negotiations). This theoretical framework is empirically applied to the case of building sites prepared for self-built housing, with a modelling methodology elaborated for Belgium. The modelling methodology, based on cross-sectional regressions, develops a spatial autoregressive specification and incorporates a multiscale comparison. By highlighting the importance of information availability and demand substitutability, this exercise confirms that a focus on interurban market spatiality can be helpful to housing researchers. In fact, the results suggest that such a focus is particularly appropriate to the analysis of the impact of planning regulations on market outcomes.

Detecting rational bubbles in the residential housing markets of Hong Kong

2001 ◽  
Vol 18 (1) ◽  
pp. 61-73 ◽  
Author(s):  
Hing Lin Chan ◽  
Shu Kam Lee ◽  
Kai Yin Woo
Keyword(s):  
Hong Kong ◽  
Housing Markets ◽  
Residential Housing ◽  
Rational Bubbles

scholarly journals Explosive Behaviour in Australian Housing Markets: Rational Bubbles or Not?

2015 ◽  
Author(s):  
Philip Inyeob Ji ◽  
Glenn Otto
Keyword(s):  
Housing Markets ◽  
Rational Bubbles

scholarly journals Identify too big to fail banks and capital insurance: An equilibrium approach

2017 ◽  
Vol 7 (4) ◽  
pp. 62-87
Author(s):  
Katerina Ivanov
Keyword(s):  
Systemic Risk ◽  
Rational Expectation ◽  
Innovation Policy ◽  
Risk Measure ◽  
Too Big To Fail ◽  
Market Participants ◽  
Policy Tool ◽  
Equilibrium Approach ◽  
Rational Expectation Equilibrium ◽  
High Level

The objective of this paper is develop a rational expectation equilibrium model of capital insurance to identify too big to fail banks. The main results of this model include (1) too big to fail banks can be identified explicitly by a systemic risk measure, loss betas, of all banks in the entire financial sector; (2) the too big to fail feature can be largely justified by a high level of loss beta; (3) the capital insurance proposal benefits market participants and reduces the systemic risk; (4) the implicit guarantee subsidy can be estimated endogenously; and lastly, (5) the capital insurance proposal can be used to resolve the moral hazard issue. We implement this model and document that the too big to fail issue has been considerably reduced in the pro-crisis period. As a result, the capital insurance proposal could be a useful macro-regulation innovation policy tool.

scholarly journals Rational speculative bubbles: A critical view

2007 ◽  
Vol 52 (174-175) ◽  
pp. 73-99
Author(s):  
Ognjen Radonjic
Keyword(s):  
Decision Making ◽  
Asset Prices ◽  
Capital Gains ◽  
Institutional Factors ◽  
Speculative Bubbles ◽  
Rational Bubbles ◽  
Market Participants ◽  
Decision Making Processes ◽  
Rational Bubble ◽  
Fundamental Value

According to the theory of rational bubbles, the bubble is present whenever asset prices progressively diverge from their fundamental value, which occurs because agents expect that asset prices will continue to grow exponentially (self-fulfilling prophecies) far in the future and consistently, which promises the realization of ever larger capital gains. In our opinion, the basic shortcoming of this theory refers to the assumption that all market agents are perfectly informed and rational and, accordingly, form homogeneous expectations. The model does not explain decision-making processes or expectation formation, nor does it detect potential psychological and institutional factors that might significantly influence decision making processes and market participants? reactions to news. Since assumptions of the model critically determine its validity, we conclude that comprehensiveness of the rational bubble model is, to put it mildly, limited.

2008 Economy Results: The End of the "Fat" Years

2009 ◽  
pp. 4-25 ◽  
Author(s):  
B. Zamaraev ◽  
A. Kiyutsevskaya ◽  
A. Nazarova ◽  
E. Sukhanov
Keyword(s):  
Economic Crisis ◽  
National Economy ◽  
Banking System ◽  
Housing Markets ◽  
Transmission Mechanism ◽  
Economic Conditions ◽  
Basic Change ◽  
Russian Economy ◽  
The World

The article analyzes the current economic conditions in Russia. Succession, distribution and the transmission mechanism of the world financial and economic crisis to the Russian economy are considered in this article as well as the changes in the banking system, share and housing markets. Production, consumption and investment on the boundary of 2008-2009 are described. The conclusion about the basic change of conditions of national economy development is presented.

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