Momentum and Reversion to Fundamentals: Are They Captured by Subjective Expectations of House Prices?

60 Pages Posted: 1 Jan 2016 Last revised: 8 Dec 2019

See all articles by Chao Ma

Chao Ma

WISE & SOE, Xiamen University

Date Written: October 1, 2019

Abstract

Many studies documented that actual asset-price movements exhibit momentum and reversion to fundamentals. We study real estate markets and find that households’ subjective house-price expectations capture momentum but not reversion to fundamentals. Moreover, if current house prices are deviated upwards (downwards) from the long-run relationship with economic fundamentals, households will have even higher (lower) expectations of future appreciations. Additional empirical results suggest that the more likely reason is that households do not have accurate perception of the fundamental value (fundamental-misperception conjecture) than that they do not believe that mispricing will be quickly corrected by the market (mispricing-persistence conjecture).

Keywords: Asset-Price Expectations, House-Price Expectations, Irrational Expectations, Momentum, Reversion to Fundamentals, House-Price Dynamics

JEL Classification: E7, G17, G4, R3

Suggested Citation

Ma, Chao, Momentum and Reversion to Fundamentals: Are They Captured by Subjective Expectations of House Prices? (October 1, 2019). Available at SSRN: https://ssrn.com/abstract=2709562 or http://dx.doi.org/10.2139/ssrn.2709562

Chao Ma (Contact Author)

WISE & SOE, Xiamen University ( email )

A 307, Economics Building
Xiamen, Fujian 10246
China

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