Analyzing Comovements in Housing Prices Using Vine Copulas

14 Pages Posted: 7 Feb 2015

See all articles by David M. Zimmer

David M. Zimmer

Western Kentucky University - Department of Economics

Date Written: April 2015

Abstract

Prior to the housing crisis, the Gaussian copula provided the basis for estimates of the degree of diversification of structured mortgage-based securities. The Gaussian copula’s popularity stemmed not only from its link to the familiar normal distribution, but also from the fact that, unlike other copula-based models, it readily extends to higher dimensions. But the Gaussian copula has asymptotic independence, such that events, regardless of the strength of their correlation, become independent if one pushes far enough into the tails. Instead, this article forms multivariate models of housing price comovements using vine copulas. These more flexible models not only fit the data better, but they also uncover far stronger correlations between housing price movements, especially during extreme market swings.

JEL Classification: G21, C32, C51

Suggested Citation

Zimmer, David M., Analyzing Comovements in Housing Prices Using Vine Copulas (April 2015). Economic Inquiry, Vol. 53, Issue 2, pp. 1156-1169, 2015, Available at SSRN: https://ssrn.com/abstract=2561663 or http://dx.doi.org/10.1111/ecin.12156

David M. Zimmer (Contact Author)

Western Kentucky University - Department of Economics ( email )

Grise Hall, Room 426
1906 College Heights Blve.
Bowling Green, KY 42101
United States

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