Detecting Periods of Exuberance: A Look at the Role of Aggregation with an Application to House Prices

33 Pages Posted: 16 Aug 2017

See all articles by Efthymios Pavlidis

Efthymios Pavlidis

Lancaster University - Department of Economics

Enrique Martínez-García

Federal Reserve Bank of Dallas - Research Department

Valerie Grossman

Federal Reserve Banks - Federal Reserve Bank of Dallas

Multiple version iconThere are 2 versions of this paper

Date Written: August 14, 2017

Abstract

The recently developed SADF and GSADF unit root tests of Phillips et al. (2011) and Phillips et al. (2015) have become popular in the literature for detecting exuberance in asset prices. In this paper, we examine through simulation experiments the effect of cross-sectional aggregation on the power properties of these tests. The simulation design considered is based on actual housing data for both U.S. metropolitan and international housing markets and thus allows us to draw conclusions for different levels of aggregation. Our findings suggest that aggregation lowers the power of both the SADF and GSADF tests. The effect, however, is much larger for the SADF test. We also provide evidence that tests based on panel data techniques, namely the panel GSADF test recently proposed by Pavlidis et al. (2015), can perform substantially better than univariate tests applied to aggregated series.

Keywords: Aggregation, Mildly explosive time series, Right-tailed unit-root tests, Sup ADF (SADF) test, Generalized sup ADF (GSADF) test, House prices

JEL Classification: C22, C12, G12, R30, R31

Suggested Citation

Pavlidis, Efthymios G and Martinez-Garcia, Enrique and Grossman, Valerie, Detecting Periods of Exuberance: A Look at the Role of Aggregation with an Application to House Prices (August 14, 2017). Available at SSRN: https://ssrn.com/abstract=3018824 or http://dx.doi.org/10.2139/ssrn.3018824

Efthymios G Pavlidis

Lancaster University - Department of Economics ( email )

Lancaster LA1 4YX, LA1 4YX
United Kingdom

Enrique Martinez-Garcia (Contact Author)

Federal Reserve Bank of Dallas - Research Department ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States
214-922-5262 (Phone)

HOME PAGE: http://sites.google.com/view/emgeconomics

Valerie Grossman

Federal Reserve Banks - Federal Reserve Bank of Dallas ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States

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