Steven Cook

The convergence of regional house prices in the UK

The ripple effect hypothesis implies a long-run convergence of regional UK house prices. However, despite many authors believing in the existence of such an underlying constancy, statistical evidence has yet to be presented supporting this implication. In this paper, an alternative approach is proposed to analyse regional house price ratios. In contrast to the findings of previous studies, application of this new procedure results in the detection of widespread convergence of house prices in a number of regions of the UK. The results suggest that the failure of previous analyses to uncover convergence is due to an underlying asymmetry in the adjustment process being ignored. Interestingly, the form of asymmetry detected varies between regions. While regions in the South East experience faster convergence following downswings in prices, other regions exhibit more rapid convergence following increases in prices.

Detecting long‐run relationships in regional house prices in the UK

Recent developments in the analysis of cointegration in the presence of asymmetric adjustment are extended and applied to data on regional house prices in the UK. This extension is found to have a dramatic impact upon the results derived. In contrast to recent studies employing standard methods, allowance for the possibility of asymmetric behaviour results in the detection of a large number of long‐run relationships between house prices in different regions. A consistent pattern of asymmetric adjustment is observed, with reversion to equilibrium occurring more rapidly (slowly) when house prices in the South of England decrease (increase) relative to other regions. While the results derived support the existence of a ripple effect underlying the observed movements in regional house prices, the extent of cointegration uncovered casts doubt upon the recently proposed notion of weak segmentation in the UK housing market.

The power of tests for non-linearity: the case of Granger-Lee asymmetry

Abstract We examine the power of the Granger-Lee [Granger, C.W.J., Lee, T.H., 1989. Investigation of production, sales and inventory relationships using multicointegration and non-symmetric error correction models. Journal of Applied Econometrics 4, S145–S159.] test for asymmetric adjustment in an error correction model. Monte Carlo simulations indicate that such tests typically have low power in rejecting the null of symmetric adjustment. The power of the test increases with the sample size and with the ratio of the variance of the independent variable to the dependent variable.

DHSY revisited: the role of asymmetries

Davidson et al.s data set is used to demonstrate the existence of a significant asymmetry in the adjustment of consumption towards equilibrium. The Granger-Lee and Escribano-Pfann methods of partitioning the error correction term are compared and it is shown that the latter produces better results in this case. It is concluded that adjustment is faster under conditions of recession than it is during boom periods.

Unit root testing against an ST-MTAR alternative: finite-sample properties and an application to the UK housing market

A class of smooth transition momentum-threshold autoregressive (ST–MTAR) tests is proposed to allow testing of the unit root hypothesis against an alternative of asymmetric adjustment about a smooth nonlinear trend. Monte-Carlo simulation is employed to derive finite-sample critical values for the proposed test and illustrate its attractive power properties against a range of stationary alternatives. The empirical relevance of the ST–MTAR test is highlighted via an application to aggregate house price data for the UK. Interestingly, house prices are found to exhibit structural change characterized a fitted logistic smooth transition process, with the newly proposed ST–MTAR test providing the most significant results of the alternative smooth transition unit root tests available.

Spurious rejection by cointegration tests incorporating structural change in the cointegrating relationship

In recent research, Leybourne and Newbold have shown commonly employed tests of cointegration to exhibit spurious rejection when applied to independent unit root processes subject to breaks in either level or trend. In the present paper, this research is extended to consider the finite-sample properties of cointegration tests which explicitly incorporate structural change. It is shown that when applied to independent unit root processes subject to regime shifts, cointegration tests permitting structural change in the cointegrating relationship can spuriously reject the null of no cointegration more frequently than the standard tests considered by Leybourne and Newbold.

The Asymmetric Effects of Monetary Policy: Some Results from a Macroeconometric Model

This paper offers evidence of the asymmetric effect of monetary policy on economic activity. First, asymmetric adjustment is captured in three macroeconomic relationships for investment, the consumer price deflator, inventories and house prices. These relationships are then embedded in a small macroeconometric model of the UK economy. Simulations on this model allow us to trace through the interactions of these asymmetries so that a monetary shock--measured by a change in interest rates--affects output and inflation in the short run in ways dependent both upon the sign of the shock and the initial state of the economy. A monetary easing has significantly larger effects on inflation when the economy is close to capacity compared with when it is in recession. These effects are captured by intrinsic asymmetries in the model, due to the use of the logarithm of interest rates and the logarithm of unemployment in the wage equation, as well as the asymmetries coming from the non-linearities which we have introduced explicitly. Copyright 2000 by Blackwell Publishers Ltd and The Victoria University of Manchester

A Disaggregated Analysis of Asymmetrical Behaviour in the UK Housing Market

Potential asymmetrical adjustment in UK house prices is considered. The present analysis extends previous research in a number of crucial ways. First, a seminal examination of asymmetry in regionally disaggregated UK house prices is undertaken. Secondly, data are examined which are further disaggregated according to the age, or vintage, of the housing stock. However, the major development concerns the application of a non-parametric testing approach to detect cyclical asymmetry. In contrast to previously employed tests in the economics literature, the Triples test employed possesses high power and is not sensitive to outliers. It is found that extensive asymmetry is present in UK house prices, with cyclical peaks typically being greater in magnitude than corresponding troughs. The implications of these findings for the comparison and construction of economic theories of the housing market, the specification of econometric models and the construction and implementation of economic policy are noted.

The robustness of modified unit root tests in the presence of GARCH

The research of Kim and Schmidt (J. Economet., 1993, 59, 287–300) is extended to examine the properties of modified Dickey–Fuller unit root tests in the presence of generalized autoregressive conditional heteroskedasticity (GARCH). Using Monte Carlo simulation, the properties of the tests are examined for a range of GARCH processes over alternative sample sizes. Oversizing is observed for all tests, with the extent of size distortion driven by the volatility, rather than the persistence, of the underlying GARCH process. While the original Dickey–Fuller test is found to exhibit greater size distortion than the modified tests, the modified tests are found to be substantially oversized when the GARCH process exhibits a high degree of volatility, even for large samples.

Correcting size distortion of the Dickey–Fuller test via recursive mean adjustment

Leybourne et al. (J. Econom. 87 (1998) 191) have shown the Dickey-Fuller (J. Amer. Statist. Assoc. 74 (1979) 427) unit root test to suffer from severe oversizing in the presence of level breaks. In this paper it is shown that recursive mean adjustment can correct this distortion, even for large breaks.