Abstract
This paper establishes that frictionless, rational-expectations models driven by specific ARMA(2,1) processes can produce equilibrium asset-price momentum, defined as persistent movements in asset-price changes. To demonstrate this, we first document that AR(2) models adequately capture the dynamics observed in U.S. house prices, particularly the strong persistence of their first differences. Next, we show that ARMA(2,1) dividends can lead to equilibrium AR(2) asset-price dynamics within a simple present-value model. Our analytical approach provides an economic interpretation of the results, highlighting the role of anticipated shocks. Finally, we document the empirical plausibility of our theory by estimating the model using house-price data. Our analysis suggests that house-price momentum does not necessarily signal irrational exuberance or significant frictions in housing markets.
Keywords
house prices; momentum; AR(2) process; rational expectations; news shocks;
JEL codes
- C32: Time-Series Models • Dynamic Quantile Regressions • Dynamic Treatment Effect Models • Diffusion Processes
- E32: Business Fluctuations • Cycles
- G12: Asset Pricing • Trading Volume • Bond Interest Rates
Replaces
Patrick Fève, and Alban Moura, “Frictionless house-price momentum”, TSE Working Paper, n. 23-1488, November 2023.
Reference
Patrick Fève, and Alban Moura, “Frictionless house-price momentum”, Journal of Economic Dynamics and Control, vol. 168, n. 105000, November 2024.
See also
Published in
Journal of Economic Dynamics and Control, vol. 168, n. 105000, November 2024