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Comovement of Home Prices: A Conditional Copula Approach
2020-03-02 22:22:00

GDP | Global Development Perspective

Working Paper No. 20.003

Feb.28, 2020

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Comovement of Home Prices:
A Conditional Copula Approach

Lei Hou, Wei Long, and Qi Li


Abstract Even though housing markets in different areas are relatively localized, regional home prices have become closely correlated and tend to be simultaneously affected by many national economic factors. In this paper, through the dynamic copula model, we confirm that regional home price dependence is time-varying and the conventional time-invariant copulas underestimate the degree of dependence during economic expansions and recessions. In essence, the U.S. residential real estate market has become more integrated since the mid-1980s. Using the conditional copula model, we further identify how the dependence among regional housing markets evolves along with some fundamental economic factors such as unemployment rate and interest rate. These findings can help investors and home buyers to better identify and evaluate the systematic risk in the nationwide housing market.

Key Words Comovement; Copula; Dependence; Home price.

1. INTRODUCTION
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2.  A BRIEF OF COPULA
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3.  SEMIPARAMETRIC ESTIMATION TO CONDITIONAL COPULAS
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4.  DATA
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5.  TIME-VARYING DEPENDENCE STRUCTURE
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6.  ESTIMATION RESULTS
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7.  CONCLUSION
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