Investigation of institutional changes in the UK housing market using structural break tests and time-varying parameter models

Zhang, Hanxiong; Hudson, Robert; Metcalf, Hugh; Manahov, Viktor

Abstract

© 2016, Springer-Verlag Berlin Heidelberg. This paper investigates the effects of institutional changes within the UK housing market in recent decades using structural break tests and time-varying parameter models. This approach is motivated by models of institutional change drawn from the political science literature which focus on the existence of both fast-moving and slow-moving institutional changes and the interactions between them as drivers of the dynamics of asset prices. As a methodological contribution, we use several time-varying parameter models for the first time in investigations of institutional change. Our findings support the existence of both structural breaks and continuous variance in parameters. This contributes to our understanding of the housing market in two respects. Firstly, the dates of structural breaks appear to better match unexpected market shocks rather than remarkable political events, and this supports prior institutional theory. Secondly, assessment of the effect of slow-moving institutional changes shows that people’s biased expectations rather than the economic fundamentals have increasingly played an important role in driving housing prices in the short run although fundamentals continue to drive house prices to converge to their long-run equilibrium.

Citation

Zhang, H., Hudson, R., Metcalf, H., & Manahov, V. (2017). Investigation of institutional changes in the UK housing market using structural break tests and time-varying parameter models. Empirical economics, 53(2), 617-640. https://doi.org/10.1007/s00181-016-1127-z

• Journal Article Type: Article
• Acceptance Date: Jun 9, 2016
• Online Publication Date: Aug 23, 2016
• Publication Date: 2017-09
• Deposit Date: Jun 20, 2016
• Publicly Available Date: Aug 23, 2016
• Journal: Empirical economics
• Print ISSN: 0377-7332
• Publisher: Springer Verlag
• Peer Reviewed: Peer Reviewed
• Volume: 53
• Issue: 2
• Pages: 617-640
• DOI: https://doi.org/10.1007/s00181-016-1127-z
• Keywords: Institutional changes; Time varying parameters; Bubbles; Housing market
• Public URL: https://hull-repository.worktribe.com/output/439856
• Publisher URL: http://link.springer.com/article/10.1007/s00181-016-1127-z
• Additional Information: This is a description of an article which has been published in: Empirical economics, 2017, volume 53, issue 2. The final publication is available at Springer via http://dx.doi.org/10.1007/s00181-016-1127-z
• Contract Date: Jun 20, 2016