Unsmoothing Real Estate Returns: A Regime-Switching Approach

Real Estate Economics, Forthcoming

Posted: 12 Aug 2011

See all articles by Colin Lizieri

Colin Lizieri

University of Cambridge - Department of Land Economy

Stephen E. Satchell

University of Cambridge - Faculty of Economics and Politics

Warapong Wongwachara

TMB Analytics

Multiple version iconThere are 2 versions of this paper

Date Written: August 12, 2011

Abstract

We propose newly developed unsmoothing techniques for appraisal-based real estate returns based on a regime-switching Threshold Autoregressive (TAR) model. We show that when true returns follow a TAR process, conventional linear autoregressive technique are misspecified and underestimate true variance. Two exogenous variables, equity returns and GDP growth, outperform other variables as regime indicators and appear to capture risks of downturns in real estate. We extend the model to the smoothing equation, allowing for switching behavior by appraisers, using two new techniques, the TAR-AR and TAR-TAR approaches. The ‘co-switching’ specification opens up a new frontier of empirical research. We estimate the TAR-TAR using FT returns as the regime indicator, and find results that outperform conventional smoothing models and have plausible economic explanations.

Keywords: Smoothing, Identification, Regime switching, Threshold Autoregressive model, Real estate returns

Suggested Citation

Lizieri, Colin M. and Satchell, Stephen E. and Wongwachara, Warapong, Unsmoothing Real Estate Returns: A Regime-Switching Approach (August 12, 2011). Real Estate Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1908882

Colin M. Lizieri (Contact Author)

University of Cambridge - Department of Land Economy ( email )

19 Silver Street
Cambridge, CB3 9EP
United Kingdom

HOME PAGE: http://www.landecon.cam.ac.uk/staff/profiles/clizieri.htm

Stephen E. Satchell

University of Cambridge - Faculty of Economics and Politics ( email )

Austin Robinson Building
Sidgwick Avenue
Cambridge, CB3 9DD
United Kingdom
44 (0)1223 335213 (Phone)
44 (0)1223 335475 (Fax)

HOME PAGE: http://www.econ.cam.ac.uk/faculty/satchell/index.h

Warapong Wongwachara

TMB Analytics ( email )

3000 Phahonyothin Rd.
Chomphon
Chatuchak, Bangkok 10900
Thailand
+66 (0) 2 299 2615 (Phone)

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