Ming-Chi Chen

Modelling house price volatility states in the UK by switching ARCH models

This article analyses investment risk in the housing market by examining volatility properties of house prices for the UK. We use both ARCH and GARCH models to estimate price conditional heteroscedasticity and find evidence of a time-varying property in the volatilities of the house price series. We then use the SWARCH model and find there are three volatility states in the price series. Our estimations suggest the UK housing markets are relatively stable and different states do not switch very often. The magnitude of high price volatility is as high as 20.99 times of the low volatility for the older housing market and 14 times of the low volatility for the new housing market. In addition, the older housing market is less efficient than the new housing market, since the impacts of events on the volatility state of the older house prices is more lasting than in new housing market.

Estimation of Housing Price Jump Risks and Their Impact on the Valuation of Mortgage Insurance Contracts

Housing price jump risk and the subprime crisis have drawn more attention to the precise estimation of mortgage insurance premiums. This study derives the pricing formula for mortgage insurance premiums by assuming that the housing price process follows the jump diffusion process, capturing important characteristics of abnormal shock events. This assumption is consistent with the empirical observation of the U.S. monthly national average new home returns from 1986 to 2008. Furthermore, we investigate the impact of price jump risk on mortgage insurance premiums from shock frequency of the abnormal events, abnormal mean and volatility of jump size, and normal volatility. Empirical results indicate that the abnormal volatility of jump size has the most significant impact on mortgage insurance premiums.

The asymmetric volatility of house prices in the UK

Purpose – The purpose of this paper is to show an indication that the asymmetric volatility between house price movement may account for the defensiveness of the housing market.Design/methodology/approach – First the UK nation‐wide house price data from the last quarter (Q4) of 1955 to the last quarter of 2005 are used and then the most suitable mean and variance equations to estimate the conditional heteroscedasticity volatilities of the returns of house prices are selected. Second, a variable that examines the leverage effect of volatility is incorporated into the model. The GJR‐GARCH model is used.Findings – The results of the empirical test show that while the lagged innovations are negatively correlated with housing return, that is when there is bad news, the current volatility of housing return might decline.Research limitations/implications – The results indicate that the volatilities between house prices moving up and moving down are asymmetric.Practical implications – The results show that there ...

The configuration analysis of fiber optic interferometer of hydrophones

This paper describes a configuration analysis of optical fiber interferometric hydrophones. We use mathematical methods to compare their characteristics and relation of sensitivity, delay fiber and physical frequency of the Sagnac type interferometer. In the experiment, we use PGC modulation technology and measure the sensitivity of the three types interferometer in this paper proposed. The preliminary results of the acoustic signal sensitivity are as follows: Michelson, compensating type Mach-Zehnder interferometer. Hybrid of a Mach-Zehnder and a Sagnac type interferometer are -201.67, -205.97, -212.47 dB re V/1 /spl mu/Pa, respectively.

A model of optimal dynamic asset allocation in a Value-at-Risk framework

This study focuses on the problem of investors in optimising dynamic asset allocation to maximise expected utility under the value-at-risk (VaR) constraint. Although Basak and Shapiro presented this topic, they assumed a complete market and employed the martingale approach to determine a dynamic asset allocation strategy. However, a complete market does not exist in the real world and the martingale approach is not suitable for portfolio selection. Consequently, this study relaxes these limitations and firstly provides a solving method to derive the dynamic asset allocation under the VaR constraint. A simple case and a general case of derivation of optimal dynamic asset allocation are explored. A continuous probability distribution also can be approximated by the discrete probability distribution discussed in this study.

The role of market imperfections in the relationship between housing prices and household credit: Evidence from Taiwan

Given the credit market imperfections in Taiwan, this paper examines the threshold effects in the adjustment towards the long‐run equilibrium relationship between housing prices and household credit. The empirical findings verify the potential for regime shifts in the dynamically adjusted relationship between housing prices and household credit. Only when the benefits cover the cost of market imperfections, do housing and credit markets trigger convergence to their long‐run equilibrium. The hidden effect of the limitations on housing and credit markets is to raise the thresholds of the self‐adjustment mechanisms. As a result, economic boom‐bust cycles will be more severe and increase the fragility of financial sectors.

Volatility Persistence in Equity REIT Market

Extreme shocks if occur will have significant and permanent impact on the risk premiums of the stock markets. Modeling these events in a conditional variance framework assuming that the stock market will mean-revert in a short time could produce spurious results. Using the Markov-switching autoregressive conditional heteroskedasticity (MS-GARCH) model to filter out the high volatility states from the low and medium volatility states, we found that the volatility persistence (“large news”) increases the returns of the equity real estate investment trust (EREIT). However, when the volatility persistence is interacted with negative shocks, it cause the EREIT returns to decline. The negative volatility persistence effects fit the story of inter-temporal asset substitution, which explain why risk-averse REIT investors substitute risky REIT assets by risk-less assets in periods of prolong negative shocks.

The structure of REIT-beta

Recent studies have documented an asymmetry in the market-beta of equity Real Estate Investment Trusts (REITs) based on high and low Gross Domestic Product (GDP) growth states, as well as in bull and bear stock markets. The asymmetry has been deemed a puzzle (Chatrath et al., 2000; Chiang et al., 2004); some previous studies explained it by describing the structural changes in REITs market and others included more variables to reduce the effect of asymmetry. What seems to be lacking, however, is a general theoretical explanation. This article provides a theoretical model in which the daily and monthly price series of REITs are separately described to explain the structure of REIT-beta and to solve this puzzle. We find there are four factors and the interaction of those determining the value of estimated beta. The results of previous studies might only be able to observe a few pieces of the nature of REIT-beta.

Construction financing in Taiwan: current state and policy regime

This innovative book analyses the role played by real estate markets in global financial stability and examines the fragile link between the two. Through what transmission channels do housing market cycles influence broader economic systems? How has the Global Financial Crisis shifted our view and understanding of these linkages? This detailed book answers these questions in an international comparative perspective. Specific topics covered include macroeconomic transmission channels of the housing cycle, the role of housing in the finance system, construction financing as a cycle amplifier, and various related public policy issues such as the policy remedies needed to deal with housing and mortgage-driven crises.

Rent Seekers vs. Producers in Cities: Contagious Housing Bubbles Force Housing Price Diffusion on Urban Overdevelopment

In recent years, housing booms have caused ghost town phenomena in many cities such as Dublin, Madrid, Dubai, etc. This paper derives a theoretical model to illustrate how activities of producers and rent seekers affect housing price booms in city centers and surrounding areas due to overdevelopment in urban growth. Because activities of producers and rent seekers are untraceable, we propose an innovative definition that housing fundamentals and bubbles are proxies for activities of producers and rent seekers respectively. We use data on the Taipei metropolitan area from 1973 to 2012 for empirical analysis. Our results show that housing price changes diffuse from the city center to the suburbs and that changes in the city center housing bubble cause price movements in the suburbs. The housing market acts as a reward system for rent seeking activities, thereby influencing investment incentives. Interestingly, the housing bubble size in the suburbs is larger than that in the city center, verifying the prediction in theory that activities of rent seekers contribute to the bubble contagion. Finally, the current vacancy rate in the suburbs is higher than that in the city center, suggesting that bubble contagion leads to overdevelopment, which then results in the appearance of so-called ghost areas.