Double-Question Survey Measures for the Analysis of Financial Bubbles and Crashes

50 Pages Posted: 6 Dec 2016

See all articles by M. Hashem Pesaran

M. Hashem Pesaran

University of Southern California - Department of Economics; University of Cambridge - Trinity College (Cambridge)

Ida Johnsson

University of Southern California, Department of Economics, Students

Multiple version iconThere are 2 versions of this paper

Date Written: December 1, 2016

Abstract

This paper proposes a new double-question survey method that elicits information about how individuals' subjective belief valuations are compared and related to their price expectations. An individual respondent is presented with two sets of questions, one that asks about his/her belief regarding the value of an asset (whether it is over- or under-valued), and another regarding his/her expectations of the future price of that asset. Responses to these two questions are then used to measure the extent to which prices are likely to move towards or away from the subjectively perceived fundamental values. Using a theoretical asset pricing model with heterogenous agents we show that there exists a negative relationship between the agents expectations of price changes and their asset valuation. Double question surveys on equity, gold and house prices provide evidence in support of such relationships, particularly in the case of house price expectations. The effects of demographic factors, such as sex, age, education, ethnicity, and income are also investigated. It is shown that for house price expectations such demographic factors cease to be statistically significant once we condition on the respondents' location and their asset valuation indicator. The results of the double-question surveys are then used to construct leading bubble and crash indicators, and their potential value is illustrated in the context of a dynamic panel regression of realized house price changes across a number of key Metropolitan Statistical Areas in the US.

Keywords: Price expectations, bubbles and crashes, house prices, belief valuations

JEL Classification: C83, D84, G12, G14

Suggested Citation

Pesaran, M. Hashem and Johnsson, Ida, Double-Question Survey Measures for the Analysis of Financial Bubbles and Crashes (December 1, 2016). USC-INET Research Paper No. 16-28. Available at SSRN: https://ssrn.com/abstract=2880856 or http://dx.doi.org/10.2139/ssrn.2880856

M. Hashem Pesaran (Contact Author)

University of Southern California - Department of Economics

3620 South Vermont Ave. Kaprielian (KAP) Hall 300
Los Angeles, CA 90089
United States

University of Cambridge - Trinity College (Cambridge) ( email )

United Kingdom

Ida Johnsson

University of Southern California, Department of Economics, Students ( email )

Los Angeles, CA
United States

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