What Causes the Positive Price-Turnover Correlation in European Housing Markets

Tinbergen Institute Discussion Paper 16-008/IV

31 Pages Posted: 6 Feb 2016

See all articles by Martijn Dröes

Martijn Dröes

University of Amsterdam

Marc Francke

University of Amsterdam - Faculty of Economics and Business (FEB); Ortec Finance

Date Written: February 2, 2016

Abstract

This paper examines what determines the correlation between prices and turnover in European housing markets. Using a panel vector auto-regressive model, we find that there is a particularly strong feedback mechanism between prices and turnover. Momentum effects are another important reason why prices and turnover are correlated. Common underlying factors, such as GDP and interest rates, also explain part of the price‐turnover correlation. The results in this paper imply that, to understand price and turnover dynamics, it is important to model prices and turnover as two interdependent processes. Ignoring this inter-dependency results in a considerable bias in the coefficient estimates of both price and turnover models.

Keywords: price‐turnover relationship; feedback; momentum effects; credit constraints; nominal loss aversion

JEL Classification: E02, R31, O18

Suggested Citation

Dröes, Martijn and Francke, Marc, What Causes the Positive Price-Turnover Correlation in European Housing Markets (February 2, 2016). Tinbergen Institute Discussion Paper 16-008/IV. Available at SSRN: https://ssrn.com/abstract=2728323 or http://dx.doi.org/10.2139/ssrn.2728323

Martijn Dröes (Contact Author)

University of Amsterdam ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

Marc Francke

University of Amsterdam - Faculty of Economics and Business (FEB) ( email )

Plantage Muidergracht 12
Amsterdam, 1018 TV
Netherlands

HOME PAGE: http://www.uva.nl/en/contact/staff/item/m.k.francke.html?f=francke

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Amsterdam, 1043 CP
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