Investigation of institutional changes in the UK housing market using structural break tests and time-varying parameter models

Zhang, Hanxiong and Hudson, Robert and Metcalf, Hugh and Manahov, Viktor (2017) Investigation of institutional changes in the UK housing market using structural break tests and time-varying parameter models. Empirical Economics, 53 (2). pp. 617-640. ISSN 0377-7332

Full content URL: http://dx.doi.org/10.1007/s00181-016-1127-z

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Abstract

This paper investigates the effects of institutional changes within the UK housing market in recent decades using structural break tests and time-varying parameter models. This approach is motivated by models of institutional change drawn from the political science literature which focus on the existence of both fast-moving and slow-moving institutional changes and the interactions between them as drivers of the dynamics of asset prices. As a methodological contribution, we use several time-varying parameter models for the first time in investigations of institutional change. Our findings support the existence of both structural breaks and continuous variance in parameters. This contributes to our understanding of the housing market in two respects. Firstly, the dates of structural breaks appear to better match unexpected market shocks rather than remarkable political events, and this supports prior institutional theory. Secondly, assessment of the effect of slow-moving institutional changes shows that people’s biased expectations rather than the economic fundamentals have increasingly played an important role in driving housing prices in the short run although fundamentals continue to drive house prices to converge to their long-run equilibrium.

Keywords:Institutional changes, Time-varying parameters, Bubbles, Housing Market
Subjects:L Social studies > L140 Econometrics
L Social studies > L410 UK Social Policy
N Business and Administrative studies > N300 Finance
L Social studies > L111 Financial Economics
L Social studies > L110 Applied Economics
Divisions:Lincoln International Business School
ID Code:25878
Deposited On:25 Jan 2017 16:16

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