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Can Anchoring and Loss Aversion Explain the Predictability in the Housing Market?Kwok Ping TsangVirginia Polytechnic Institute & State University Tin Cheuk LeungChinese University of Hong Kong (CUHK) January 21, 2011 Abstract: We offer an explanation of why changes of house price are predictable. Extending the static model in Leung and Tsang (2010), we analyze the housing market with loss averse sellers and anchoring buyers in a dynamic setting. Buyer’s current offer price increases with the housing unit’s previous purchase price, and seller has the tendency to delay sale of a housing unit that has a loss. We show that when both cognitive biases are present, changes in house price are predicted by price dispersion and trade volume. Using a sample of housing transactions in Hong Kong from 1992 to 2006, we find that price dispersion and transaction volume are indeed powerful predictors of housing return. For forecasting both in and out of sample, the two variables perform as well as conventional predictors like real interest rate and real stock return.
Number of Pages in PDF File: 28 Keywords: Housing Return Predictability, Price Dispersion, Anchoring, Loss Aversion, Hong Kong Housing Market JEL Classification: R31, C53, D03 working papers seriesDate posted: January 25, 2011 ; Last revised: July 20, 2011Suggested Citation |
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