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Econometrics 2017, 5(3), 40; doi:10.3390/econometrics5030040

Short-Term Expectation Formation Versus Long-Term Equilibrium Conditions: The Danish Housing Market

Department of Economics, University of Copenhagen, 1353 Copenhagen K, Denmark
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Author to whom correspondence should be addressed.
Academic Editor: Katarina Juselius
Received: 28 February 2017 / Revised: 1 August 2017 / Accepted: 25 August 2017 / Published: 4 September 2017
(This article belongs to the Special Issue Recent Developments in Cointegration)
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Abstract

The primary contribution of this paper is to establish that the long-swings behavior observed in the market price of Danish housing since the 1970s can be understood by studying the interplay between short-term expectation formation and long-run equilibrium conditions. We introduce an asset market model for housing based on uncertainty rather than risk, which under mild assumptions allows for other forms of forecasting behavior than rational expectations. We test the theory via an I(2) cointegrated VAR model and find that the long-run equilibrium for the housing price corresponds closely to the predictions from the theoretical framework. Additionally, we corroborate previous findings that housing markets are well characterized by short-term momentum forecasting behavior. Our conclusions have wider relevance, since housing prices play a role in the wider Danish economy, and other developed economies, through wealth effects. View Full-Text
Keywords: asset pricing; cointegration; I(2) analysis; housing market; imperfect knowledge; Knightian uncertainty; long swings asset pricing; cointegration; I(2) analysis; housing market; imperfect knowledge; Knightian uncertainty; long swings
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This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. (CC BY 4.0).

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Hetland, A.; Hetland, S. Short-Term Expectation Formation Versus Long-Term Equilibrium Conditions: The Danish Housing Market. Econometrics 2017, 5, 40.

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