Time-Varying Correlation in Housing Prices

Posted: 28 May 2015

See all articles by David M. Zimmer

David M. Zimmer

Western Kentucky University - Department of Economics

Date Written: May 27, 2015

Abstract

In the wake of the housing crisis, credit rating agencies have received much blame, particularly for the statistical tools they used to measure correlations in housing prices in different locations. Several studies have proposed alternative statistical models, but to date, all such approaches assume that correlations remain constant over time. This paper argues that, regardless of the correlation patterns built into such statistical models, correlations might strengthen during times of financial turmoil. Consequently, mortgage-backed securities might have been appropriately diversified during "normal" times, but less so during extreme market swings. Using monthly data on housing prices in four major U.S. cities, the main findings confirm that housing prices do, indeed, exhibit correlations that change over time, and more importantly, those correlations appear to strengthen in the midst of market turmoil.

Keywords: Copula, CDO, Dependence; Contagion

JEL Classification: G21, C32, C51

Suggested Citation

Zimmer, David M., Time-Varying Correlation in Housing Prices (May 27, 2015). Journal of Real Estate Finance and Economics, Vol. 51, No. 1, 2015, Available at SSRN: https://ssrn.com/abstract=2611288

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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