Mean Reversion and Momentum: Another Look at the Price-Volume Correlation in the Real Estate Market

Posted: 3 Aug 2009

See all articles by Yuval Arbel

Yuval Arbel

Technion-Israel Institute of Technology - Faculty of Architecture and Town Planning

Danny Ben-Shahar

Tel Aviv University

Eyal Sulganik

Interdisciplinary Center (IDC) Herzliyah - Adelson School of Entrepreneuship

Date Written: July 31, 2009

Abstract

Based on behavioral finance and economics literature, we construct a theoretical framework in which consumers of newly constructed housing units perceive prices to follow a stochastic mean reversion pattern. Given this belief and the high carrying cost maintained by real estate developers, potential buyers opt to either exercise immediately or defer the purchase. We simulate the model within a real option framework by which we show that the optimal time to wait before exercising a purchase is positively related to the price level; hence, a negative (positive) correlation between transaction volume and price level (yield) emerges. Observing data on housing prices and new construction sales in Israel for the years 1998-2007, we apply an adaptive expectation regression model to test consumers' belief in both mean reversion and momentum price patterns. The empirical evidence shows that while consumers' demand pattern is simultaneously consistent with the belief in both momentum and mean reversion processes, the effect of the latter generally dominates. Moreover, while the data does not allow for testing the volume and price-level correlation, it does provide support to the positive volume-price yield correlation.

Keywords: mean reversion, momentum, price-volume, positive feedback, correlation, housing prices, irrational

Suggested Citation

Arbel, Yuval and Ben-Shahar, Danny and Sulganik, Eyal, Mean Reversion and Momentum: Another Look at the Price-Volume Correlation in the Real Estate Market (July 31, 2009). Journal of Real Estate Finance and Economics, Vol. 39, No. 3, 2009. Available at SSRN: https://ssrn.com/abstract=1441975

Yuval Arbel

Technion-Israel Institute of Technology - Faculty of Architecture and Town Planning ( email )

Technion City
Haifa 32000
Israel

Danny Ben-Shahar (Contact Author)

Tel Aviv University ( email )

Tel Aviv
Israel

Eyal Sulganik

Interdisciplinary Center (IDC) Herzliyah - Adelson School of Entrepreneuship ( email )

P.O. Box 167
Herzliya, 46150
Israel
972-9-9572307 (Phone)
972-9-9568605 (Fax)

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