Unsmoothing Real Estate Returns: A Regime‐Switching Approach

33 Pages Posted: 28 Dec 2012

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: Winter 2012

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 techniques are misspecified and underestimate true variance. Two exogenous variables, equity returns and gross domestic product 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 we find results that outperform conventional smoothing models and have plausible economic explanations.

Suggested Citation

Lizieri, Colin M. and Satchell, Stephen E. and Wongwachara, Warapong, Unsmoothing Real Estate Returns: A Regime‐Switching Approach (Winter 2012). Real Estate Economics, Vol. 40, Issue 4, pp. 772-804, 2012. Available at SSRN: https://ssrn.com/abstract=2194271 or http://dx.doi.org/10.1111/j.1540-6229.2012.00331.x

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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