An Anatomy of Price Dynamics in Illiquid Markets: Analysis and Evidence from Local Housing Markets

38 Pages Posted: 1 Oct 2003

See all articles by Dennis R. Capozza

Dennis R. Capozza

Ross School of Business, University of Michigan

Patric H. Hendershott

University of Aberdeen - Centre for Property Research; National Bureau of Economic Research (NBER)

Charlotte Mack

University of Michigan at Ann Arbor

Date Written: August 19, 2003

Abstract

This research analyzes the dynamic properties of the difference equation that arises when markets exhibit serial correlation and mean reversion. We identify the correlation and reversion parameters for which prices will overshoot equilibrium ("cycles") and/or diverge permanently from equilibrium. We then estimate the serial correlation and mean reversion coefficients from a large panel data set of 62 metro areas from 1979-1995 conditional on a set of economic variables that proxy for information costs, supply costs and expectations. Serial correlation is higher in metro areas with higher real incomes, population growth and real construction costs. Mean reversion is greater in large metro areas and faster-growing cities with lower construction costs. The average fitted values for mean reversion and serial correlation lie in the convergent oscillatory region but specific observations fall in both the damped and oscillatory regions and in both the convergent and divergent regions. Thus, the dynamic properties of housing markets are specific to the given time and location being considered.

Keywords: dynamics, mean reversion, serial correlation, housing

JEL Classification: G1, D0, R0

Suggested Citation

Capozza, Dennis R. and Hendershott, Patric H. and Mack, Charlotte, An Anatomy of Price Dynamics in Illiquid Markets: Analysis and Evidence from Local Housing Markets (August 19, 2003). Available at SSRN: https://ssrn.com/abstract=436984 or http://dx.doi.org/10.2139/ssrn.436984

Dennis R. Capozza (Contact Author)

Ross School of Business, University of Michigan ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States
734 995 7271 (Phone)
734 629-0635 (Fax)

Patric H. Hendershott

University of Aberdeen - Centre for Property Research ( email )

Aberdeen AB24 2UF
Scotland

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Charlotte Mack

University of Michigan at Ann Arbor ( email )

500 S. State Street
Ann Arbor, MI 48109
United States

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