Is the housing market set to fall?

Some analysts have suggested that house prices are set to collapse, particularly in the London area. These conclusions are generally based on a rather simple analysis of house price to income ratios. We argue that this is misleading and there is little evidence to suggest a collapse in the market.     

Can overconfidence explain the consumption hump?

The standard neoclassical life-cycle model predicts that individual consumption should either increase, remain constant or fall monotonically depending on whether the market rate of return on savings is greater than, equal to or less than the discount rate. However, empirical evidence suggests that even after controlling for economic growth and family size, household consumption exhibits a robust hump at around age 45–55, with the ratio of peak consumption to consumption when entering the workforce greater than 1.1. This paper extends the “overconfidence” explanation (Caliendo and Huang, J. Macroecon 30(4):1347–1369, 2008) of this macroeconomic puzzle to a calibrated general equilibrium environment. The main finding is that although it is possible to identify parameter values under which overconfidence alone generates life-cycle consumption profiles and macro-indicators consistent with U.S. experience, quite extreme assumptions about both the magnitude and distribution of overconfidence in the population are generally required to obtain them.     

Do policymakers need to cool the UK housing market?

The combination of government schemes and a recovery in the wider economy underpinned a robust pickup in housing transactions and house prices through 2013. But there is no evidence of a housing bubble across most of the country. Across the majority of regions prices are still below previous peaks in nominal terms and much lower still in real terms. Meanwhile measures of affordability and indebtedness are in a much better state than they were prior to the financial crisis. The exception is London, where supply shortages and strong demand have pushed both the price‐to‐income ratio and average income multiple back to previous highs. An improving macroeconomic backdrop and ongoing support from Help to Buy should ensure that demand continues to strengthen, supporting further growth in transactions. There has been a strong supply response over the past nine months and this should continue, which will help to keep a lid on price growth. Divergent macroeconomic prospects across the regions will lead to a wide variation in house price growth, with London expected to lead the way. We do not see a case for changing the terms of Help to Buy, particularly given that the most likely source of a bubble is London, where the impact of Help to Buy is likely to be small. In our view, the average income multiple is crucial and macro prudential tools should be used if it continues to rise above previous peaks in any regions. The most likely cause of a bubble at the national level would be an inadequate supply response. Alongside its policies to support demand, the government should implement a series of measures aimed at increasing supply, including planning reform, and it could also consider using its low borrowing costs to fund public sector house building.     

Can structural change explain the Meese-Rogoff puzzle?

This paper provides empirical evidence suggesting that fundamentals matter for stock price fluctuations once temporal instability underpinning stock price-relations is accounted for. Specifically, this study extends the out-of sample forecasting methodology of Meese and Rogoff (J Int Econ 14:3–24 (1983)) to the stock market after explicitly testing for parameter nonconstancy using recursive techniques. The predictive ability of a present value model based on Imperfect Knowledge Economics (IKE) is found to match that of the pure random walk benchmark at short forecasting horizons and to perform significantly better at medium to longer-run horizons based on conventional measures of predictability and direction of change statistics. In addition, the presence of a cointegrating relation is found only within regimes of statistical parameter constancy. Augmenting the MR methodology in a piecewise linear fashion yields empirical results in favor of a fundamentals-based account of stock price behavior overturning the recent results of Flood and Rose (2010).     

Can social media lead to labor market discrimination? Evidence from a field experiment

In this paper, we investigate the role of social media as a source of information for recruiters to discriminate applicants. We set up a field experiment over a 12‐month period, involving more than 800 applications from two fictitious applicants which differed in their perceived origins, which is an information available only from their Facebook profiles. During the experiment, an unexpected change in the Facebook layout reduced the salience of the information available on social media profiles. Before this change, a significant 41.7% gap between the two applicants callback rates highlights that personal online profiles are used by recruiters as a source of information to discriminate against applicants of foreign origin. After the layout change that mitigates our signal, the difference in callback rates fades away. This result suggests that the screening conducted by the employers does not go beyond the main pages of profiles. It also illustrates that design choices made by online platforms may have important consequences on the extent of discrimination.     

What drives returns to euro area housing? Evidence from a dynamic dividend–discount model

We apply a dynamic dividend–discount model to analyse housing returns for eight euro area countries comprising over 90% of euro area GDP, both individually and as a panel. A vector autoregressive model (VAR) is estimated for four variables – excess return to housing, rents, the real interest rate and real disposable per capita income – using quarterly data over the period 1978–2009. This empirical investigation – which allows for a decomposition of house price movements into movements in rent (cash-flow) and expected return news components – indicates that the bulk of the variability of euro area house price movements can be attributed to movements in fundamentals. There remains nonetheless an important but less sizeable influence of market-wide (or expected-return) variations in house prices. Country-specific estimation indicates considerable heterogeneity around the euro area result, both for what concerns long-term impacts and dynamics. Notably, changes in expected returns play a relatively strong role in the house prices of Ireland and Spain.     

Can we model the educational process?

Operational analysis has not yet made a contribution to the improvement of the educational process. There are several reasons for this. First, relative to the magnitude of the job of teaching our youth, financial support for educational research and analysis has been much smaller than for other problem areas, e.g., health.

The second difficulty is in the relationship between operational analysis and theory. The more complete the theory, the better the system designs resulting from analysis. For education there is no theory. Worse, there are few efforts to develop such theory. It must be recognized, however, that the phenomenon called learning is very complex.

The lack of theory means that the system design proceeds with more uncertainty. Large “safety factors” must be built in. This means that educational systems have to be expensive.

Large, continuing financial support is required; first, to build up present school systems, so that they perform well under existing, changing circumstances; and, second, to support research that will provide theories and models which in turn will lead to more effective learning systems.     

Forecasting expected shortfall: Should we use a multivariate model for stock market factors?

Is univariate or multivariate modeling more effective when forecasting the market risk of stock portfolios? We examine this question in the context of forecasting the one-week-ahead expected shortfall of a stock portfolio based on its exposure to the Fama–French and momentum factors. Applying extensive tests and comparisons, we find that in most cases there are no statistically significant differences between the forecasting accuracy of the two approaches. This result suggests that univariate models, which are more parsimonious and simpler to implement than multivariate factor-based models, can be used to forecast the downside risk of equity portfolios without losses in precision.     

Can group identity explain the gender gap in the recruitment process?

Despite evidence that the gender gap in the labour market favours men, aggregate findings from correspondence studies show that women are more likely than men to be invited for a job interview. We hypothesize that the predominance of women among recruiters may explain this somewhat puzzling finding; recruiters may favour applicants of their own gender. We use the data from a large-scale correspondence study to test this hypothesis. As expected, we find that female applicants are more likely to receive callbacks for interview. We also see that in our sample the majority of contact persons responsible for the recruitment process are female. More importantly, we find that if recruiter and applicant are of the same gender, then the likelihood that the applicant will be invited for an interview increases. These findings reveal the gender favouritism at the selection stage in the labour market.     

Is the government in danger of inflating a housing bubble?

Despite very strong inflation prior to the financial crisis, the correction in UK house prices has been relatively modest and much smaller than those in countries such as the US, Ireland and Spain. The relative resilience of the UK market appears to be a reflection of very tight supply which has effectively put a floor under prices.…     

The dynamics of US inflation: Can monetary policy explain the changes?

We investigate the relationship between monetary policy and inflation dynamics in the US using a medium scale structural model. The specification is estimated with Bayesian techniques and fits the data reasonably well. Policy shocks account for a part of the decline in inflation volatility; they have been less effective in triggering inflation responses over time and qualitatively account for the rise and fall in the level of inflation. A number of structural parameter variations contribute to these patterns.     

On parameter estimation of Heston’s stochastic volatility model: a polynomial filtering method

Decisions in Economics and Finance - In this paper, we investigate the problem of estimating the volatility from the underlying asset price for discrete-time observations. This topic has attracted...     

Does the market perceive a difference in rating agencies?

A frequent and recent topic in the financial press concerns the two major rating agencies, Moody’s and Standard & Poor’s. The reported perception is that Moody’s is less credible. In this study, we determine whether the market shares this perception and whether this perception carries an economic cost. Since there are many features attached to a bond issue that affect its yield, differences in bond rating cannot be tested in isolation. This paper estimates the impact of differences in ratings as well as several other key bond features (call and sinking fund features, and syndication) of public issues of corporate bonds using regression analysis over the period 1986 through 1996. All features tested except the sinking fund option for doubling and tripling the amount of funds retired are found to be significant including the variable measuring the market’s perception of the informational content of ratings from the two rating agencies. Thus, we conclude that the market finds value in the ratings from each agency, but that the value is not symmetrical between the two agencies. There is not enough evidence that the market values one agency over the other.     

What factors drive the price–rent ratio for the housing market? A modified present-value analysis

We consider which factors determined the price–rent ratio for the housing market in 18 U.S. metropolitan statistical areas (MSAs) and at the national level over the period of 1975–2014. Based on a present-value framework, our proposed empirical model separates the price–rent ratio for a given market into unobserved components related to the expected real rent growth and the expected housing return, but is modified from standard present-value analysis by also including a residual component that captures non-stationary deviations of the price–rent ratio from its present-value level. Estimates for the modified present-value model suggest that the present-value residual (PVR) component is always important and sometimes very large at the national and MSA levels, especially for MSAs that have experienced frequent booms and busts in the housing market. In further analysis, we find that house prices in MSAs that have larger PVR components are more sensitive to mortgage rate changes. These are also the MSAs with less elastic housing supply. Also, comparing our results with a recent statistical test for periodically-collapsing bubbles, we find that MSAs with large estimated PVR components are the same MSAs that test positively for explosive sub-periods in their price–rent ratios, especially during the 2005–2007 subsample. Our approach allows us to estimate the correlation between shocks to expected rent growth, the expected housing return, and the PVR component. We find that the expected housing return and movements in the PVR component are highly positively correlated implying an impact of the expected housing return on house prices that is amplified from what a standard present-value model would imply. Our results also show that most of the variation in the present-value component of the price–rent ratio arises due to the variation in the expected housing return.     

Can money market mutual funds provide sufficient liquidity to replace deposit insurance?

Narrow banking is an arrangement in which deposittaking and lending functions are separated and performed by different institutions. This separation is aimed at avoiding panics at uninsured banks, without moral hazard associated with deposit insurance. Money Market Mutual Funds (MMMFs) are promoted as replacements for bank deposits. For MMMFs to compete with banks, they must be able to withstand a monetary shock without losing shareholders in a flight to quality at government-insured institutions. VAR analysis indicates that MMMFsincrease share issue subsequent to a monetary tightening. This bolsters the case that liquidity can be provided in a narrow banking framework. This research is supported by a summer research grant from the Barton School of Business at Wichita State University.     

Modeling spot rate using a realized stochastic volatility model with level effect and dynamic drift☆

This paper proposes a class of realized stochastic volatility model based on both various realized volatility measures and spot rate. It applies the realized stochastic volatility model (Takahashi, Omori, & Watanabe, 2009, and Koopman & Scharth, 2013) to the spot rate model with dynamic drift and level effect setups (RSVL). A jointly approximated maximum likelihood procedure is used to estimate this model. The simulation results show that the RSVL model can be consistently estimated and noise-and-jump-robust realized volatility measures improve the accuracy of the estimation. This study empirically investigates the Chinese interbank repo market with RSVL model, which manifested the advantage of taking the level effect and nonlinear drift into consideration. The noise-and-jump-robust realized volatility measures (e.g. subsample realized volatility and threshold pre-average realized volatility) decrease the volatility fitting error. The nonparametric testing suggests that the RSVL model with noise-and-jump-robust realized volatility measures has more power on forecasting excess kurtosis and fat tails and predicting dynamics of higher order autocorrelations.     

Do landlords discriminate in the rental housing market? Evidence from an internet field experiment in US cities

This paper tests for racial discrimination in the rental housing market using matched-pair audits conducted via e-mail for rental units advertised on-line. We reveal home-seekers’ race to landlords by sending e-mails from names with a high likelihood of association with either whites or African Americans. Generally, discrimination occurs against African American names; however, when the content of the e-mail messages insinuates home-seekers with high social class, discrimination is non-existent. Racial discrimination is more severe in neighborhoods that are near “tipping points” in racial composition, and for units that are part of a larger building.     

Company performance in Ukraine: is this a market economy?

This paper examines empirically the responsiveness of firm performance to ownership and market structures, sector and regional specificity, and varying degrees of soft budget constraints. It does so by providing a “snapshot” of the economy. For cross-sectional data on Ukrainian firms in 1998, the paper presents evidence that the firms in the snapshot behaved more as if they were still in a loosely reformed Soviet environment where exchange via interpersonal connections, rather than the price mechanism, determined the allocation of resources.     

Can street markets be a sustainable strategy to mitigate food insecurity in emerging countries? Insights from a competitive facility location model

This research explores the sustainability of street markets to grant access to fruits and vegetables (F&Vs) to underserved communities in emerging economies. Specifically, this paper studies the impact of adding new street markets to satisfy the demand of end consumers in a real case. To do so, we developed a novel non-linear mathematical model to establish the location and number of street markets. This model, a variant of the competitive facility location problem, includes specific features of street markets, such as their itinerant nature and the dynamic shopping behavior of customers. To feed the model, we collected data from both primary and secondary sources: we surveyed the main competitors of the street markets (i.e., small, family-owned retailers or nanostores) to investigate their market share and purchasing habits. The problem was solved with an ad-hoc iterative method. The results suggest that street markets can provide better access to F&Vs to food-insecure households to some extent. Still, their management, operational complexity, and financial sustainability may limit their applicability in the long term.     

Can media and text analytics provide insights into labour market conditions in China?

The official Chinese labour market indicators have been seen as problematic given their small cyclical movement and their only partial capture of the labour force. In our paper, we build a monthly Chinese labour market conditions index (LMCI) using text analytics applied to Mainland Chinese-language newspapers over the period from 2003 to 2017. We use a supervised machine learning approach by training a support vector machine classification model. The information content and the forecast ability of our LMCI are tested against official labour market activity measures in wage and credit growth estimations. Surprisingly, one of our findings is that the much-maligned official labour market indicators do contain information. However, their information content is not robust and, in many cases, our LMCI can provide forecasts that are significantly superior. Moreover, regional disaggregation of the LMCI illustrates that labour conditions in the export-oriented coastal region are sensitive to export growth, while those in inland regions are not. This suggests that text analytics can, indeed, be used to extract useful labour market information from Chinese newspaper articles.