Identification and Critical Time Forecasting of Real Estate Bubbles in the U.S.A and Switzerland

56 Pages Posted: 12 Jul 2014

See all articles by Diego Ardila

Diego Ardila

ETH Zurich

Dorsa Sanadgol

ETH Zurich

Peter Cauwels

ETH Zurich; Director Quaerens CommV

Didier Sornette

ETH Zürich - Department of Management, Technology, and Economics (D-MTEC); Swiss Finance Institute

Date Written: July 3, 2014

Abstract

We present a hybrid model for diagnosis and critical time forecasting of real estate bubbles. The model combines two elements: 1) the Log Periodic Power Law (LPPL) model to describe endogenous price dynamics originated from positive feedback loops between economic agents; and 2) a diffusion index method that creates a parsimonious representation of multiple macroeconomic variables. We examine the behavior of our model on the housing price indices of 380 US metropolitan areas, using 15, 35, and 90 national-level macroeconomic time series and a dynamic forecasting methodology. Empirical results suggests that the model is able to forecast the end of the bubbles and to identify variables highly relevant during the bubble regime. In addition, the same methodology is applied to the national housing price index of Switzerland, diagnosing a bubble in which global imbalances and Switzerland's status as a safe haven seem to be playing a dominant role.

Keywords: real-estate bubbles, USA and Switzerland, diffusion index, forecasting, log-periodic power law, criticality, positive feedback, sparse partial least squares

JEL Classification: C12, C22, C52, G01, G17

Suggested Citation

Ardila, Diego and Sanadgol, Dorsa and Cauwels, Peter and Sornette, Didier, Identification and Critical Time Forecasting of Real Estate Bubbles in the U.S.A and Switzerland (July 3, 2014). Swiss Finance Institute Research Paper No. 14-44. Available at SSRN: https://ssrn.com/abstract=2465000 or http://dx.doi.org/10.2139/ssrn.2465000

Diego Ardila

ETH Zurich ( email )

Rämistrasse 101
ZUE F7
Zürich, 8092
Switzerland

Dorsa Sanadgol

ETH Zurich ( email )

CER-ETH Center of Economic Research at ETH Zurich
ZUE F7
Zurich, 8092
Switzerland

Peter Cauwels

ETH Zurich

Rämistrasse 101
ZUE F7
Zürich, 8092
Switzerland

Director Quaerens CommV ( email )

Bruges
Belgium

Didier Sornette (Contact Author)

ETH Zürich - Department of Management, Technology, and Economics (D-MTEC) ( email )

Scheuchzerstrasse 7
Zurich, ZURICH CH-8092
Switzerland
41446328917 (Phone)
41446321914 (Fax)

HOME PAGE: http://www.er.ethz.ch/

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Register to save articles to
your library

Register

Paper statistics

Downloads
606
Abstract Views
2,268
rank
43,038
PlumX Metrics