Detecting Periods of Exuberance: A Look at the Role of Aggregation with an Application to House Prices
33 Pages Posted: 16 Aug 2017
Date Written: August 14, 2017
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
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