Working Paper

Detecting Periods of Exuberance: A Look at the Role of Aggregation with an Application to House Prices

Abstract: The recently developed SADF and GSADF unit root tests of Phillips et al. (2011) and Phillips et al. (2015) have become popular in the literature for detecting exuberance in asset prices. In this paper, we examine through simulation experiments the effect of cross-sectional aggregation on the power properties of these tests. The simulation design considered is based on actual housing data for both U.S. metropolitan and international housing markets and thus allows us to draw conclusions for different levels of aggregation. Our findings suggest that aggregation lowers the power of both the SADF and GSADF tests. The effect, however, is much larger for the SADF test. We also provide evidence that tests based on panel data techniques, namely the panel GSADF test recently proposed by Pavlidis et al. (2015), can perform substantially better than univariate tests applied to aggregated series.

JEL Classification: C12; C22; G12; R30; R31;

https://doi.org/10.24149/gwp325r1

Bibliographic Information

Provider: Federal Reserve Bank of Dallas

Part of Series: Globalization Institute Working Papers

Publication Date: 2018-07-01

Number: 325

Pages: 45 pages