Detecting Tranquil and Bubble Periods in Housing Markets: A Review and Application of Statistical Methods

  • Jun NagayasuEmail author
Part of the Dynamic Modeling and Econometrics in Economics and Finance book series (DMEF, volume 27)


We provide a brief review of recent developments in research on price movements of real estate, especially bubbles, and highlight the gap between theoretical and statistical approaches to bubble detection. We also propose applying a top-down strategy to a bounds testing method (Pesaran et al. in J. Appl. Econom. 16(3):289–326, 2001) to investigate rational price bubbles. Furthermore, by introducing nonlinearity into the autoregressive distributed lag model, we modify the bounds test to be more suitable for bubble analyses.


Rational bubbles Mild bubbles Explosive bubbles Threshold autoregressive distributed lag model Stationarity 

JEL Classification

E1 G1 



The earlier version of this paper was presented at the annual meeting of the Nippon Finance Association. I modified and extended the conference paper (Nagayasu 2016) substantially. I would like to thank Naoya Katayama and the conference participants for constructive comments. However, all remaining errors are mine.


  1. Abreu, D., & Brunnermeier, M. K. (2003). Bubbles and crashes. Econometrica, 71(1), 173–204. Scholar
  2. Adams, Z., & Fuss, R. (2010). Macroeconomic determinants of international housing markets. Journal of Housing Economics, 19, 38–50.CrossRefGoogle Scholar
  3. Barunik, J., & Krehlik, T. (2018). Measuring the frequency dynamics of financial connectedness and systemic risk. Journal of Financial Econometrics, 16(2), 271–296.CrossRefGoogle Scholar
  4. Bhargava, A. (1986). On the theory of testing for unit roots in observed time series. Review of Economic Studies, 53(3), 369–384.CrossRefGoogle Scholar
  5. Blanchard, O. J., & Watson, M. W. (1982). Bubbles, rational expectations and financial markets (Working Paper 945). National Bureau of Economic Research.Google Scholar
  6. Choi, J. J., Kedar-Levy, H., & Yoo, S. S. (2015). Are individual or institutional investors the agents of bubbles? Journal of International Money and Finance, 59, 1–22.CrossRefGoogle Scholar
  7. Choi, N., & Skiba, H. (2015). Institutional herding in international markets. Journal of Banking & Finance, 55, 246–259.CrossRefGoogle Scholar
  8. De Bondt, W. F. M., & Thaler, R. (1985). Does the stock market overreact? Journal of Finance, 40(3), 793–805. Scholar
  9. De Long, J. B., Shleifer, A., Summers, L. H., & Waldmann, R. J. (1990). Noise trader risk in financial markets. Journal of Political Economy, 98(4), 703–738.Google Scholar
  10. De Wit, E. R., Englund, P., & Francke, M. K. (2013). Price and transaction volume in the dutch housing market. Regional Science and Urban Economics, 43, 220–241.CrossRefGoogle Scholar
  11. Diba, B. T & Grossman, H. I. (1988). Explosive rational bubbles in stock prices? American Economic Review, 78(3), 520–530.Google Scholar
  12. Diebold, F. X., & Yilmaz, K. (2009). Measuring financial asset return and volatility spillovers, with application to global equity markets. Economic Journal, 119(534), 158–171. Scholar
  13. Diebold, F. X., & Yilmaz, K. (2012). Better to give than to receive: Predictive directional measurement of volatility spillovers. International Journal of Forecasting, 28(1), 57–66.CrossRefGoogle Scholar
  14. Driffill, J., & Sola, M. (1998). Intrinsic bubbles and regime-switching. Journal of Monetary Economics, 42(2), 357–373.CrossRefGoogle Scholar
  15. Easley, D., Hvidkjaer, S., & O’Hara, M. (2002). Is information risk a determinant of asset returns? Journal of Finance, 57(5), 2185–2221. Scholar
  16. Engle, R. F., & Granger, C. W. J. (1987). Co-integration and error correction: Representation, estimation, and testing. Econometrica, 55(2), 251–276.CrossRefGoogle Scholar
  17. Evans, G. (1991). Pitfalls in testing for explosive bubbles in asset prices. American Economic Review, 81(4), 922–30.Google Scholar
  18. Fama, E. F. (1970). Efficient capital markets: A review of theory and empirical work. Journal of Finance, 25(2), 383–417.CrossRefGoogle Scholar
  19. Froot, K. A., & Obstfeld, M. (1991). Intrinsic bubbles: The case of stock prices. American Economic Review, 81(5), 1189–1214.Google Scholar
  20. Gallin, J. (2006). The long-run relationship between house prices and income: Evidence from local housing markets. Real Estate Economics, 34(3), 417–438.CrossRefGoogle Scholar
  21. Gibbons, M. R., & Hess, P. (1981). Day of the week effects and asset returns. Journal of Business, 54(4), 579–596.CrossRefGoogle Scholar
  22. Gurkaynak, R. S. (2008). Econometric tests of asset price bubbles: Taking stock. Journal of Economic Surveys, 22(1), 166–186.CrossRefGoogle Scholar
  23. Hendry, D. (1984). Econometric modelling of house prices in the United Kingdom. Oxford: Basil Blackwell.Google Scholar
  24. Hirshleifer, D., & Shumway, T. (2003). Good day sunshine: Stock returns and the weather. Journal of Finance, 58(3), 1009–1032. Scholar
  25. Homm, U., & Breitung, J. (2012). Testing for speculative bubbles in stock markets: A comparison of alternative methods. Journal of Financial Econometrics, 10(1), 198–231.CrossRefGoogle Scholar
  26. Im, K. S., Pesaran, M. H., & Shin, Y. (2003). Testing for unit roots in heterogeneous panels. Journal of Econometrics, 115(1), 53–74.CrossRefGoogle Scholar
  27. Kraussl, R., Lehnert, T. & Martelin, N. (2016). Is there a bubble in the art market? Journal of Empirical Finance, 35(C), 99–109.Google Scholar
  28. McGibany, J. M., & Nourzad, F. (2004). Do lower mortgage rates mean higher housing prices? Applied Economics, 36(4), 305–313. Scholar
  29. Meese, R., & Wallace, N. (1994). Testing the present value relation for housing prices: Should I leave my house in San Francisco? Journal of Urban Economics, 35(3), 245–266.CrossRefGoogle Scholar
  30. Meese, R., & Wallace, N. (2003). House price dynamics and market fundamentals: The Parisian housing market. Urban Studies, 40, 1027–1045.CrossRefGoogle Scholar
  31. Montagnoli, A., & Nagayasu, J. (2015). UK house price convergence clubs and spillovers. Journal of Housing Economics, 30(C), 50–58.Google Scholar
  32. Nagayasu, J. (2016). A top-down method for rational bubbles: Application of the threshold bounds testing approach. In Nippon Finance Association Proceedings.Google Scholar
  33. Nagayasu, J. (2018). Condominium prices and inflation: the role of financial inflows and transaction volumes in Japan, DSSR Discussion Papers 76. Graduate School of Economics and Management, Tohoku University, Japan.Google Scholar
  34. Nelson, C. R. & Plosser, C. I. (1982). Trends and random walks in macroeconmic time series: some evidence and implications. Journal of Monetary Economics, 10(2), 139–162.Google Scholar
  35. Oikarinen, E. (2012). Empirical evidence on the reaction speeds of housing prices and sales to demand shocks. Journal of Housing Economics, 21, 41–54.CrossRefGoogle Scholar
  36. Ooi, J., & Lee, S.-T. (2006). Price discovery between residential & housing markets. Journal of Housing Research, 15(2), 95–112.CrossRefGoogle Scholar
  37. Pavlidis, E., Yusupova, A., Paya, I., Peel, D., Martínez-García, E., Mack, A., et al. (2016). Episodes of exuberance in housing markets: In search of the smoking gun. Journal of Real Estate Finance and Economics, 53(4), 419–449.CrossRefGoogle Scholar
  38. Pesaran, H., & Shin, Y. (1998). Generalized impulse response analysis in linear multivariate models. Economics Letters, 58(1), 17–29.CrossRefGoogle Scholar
  39. Pesaran, M. H., Shin, Y., & Smith, R. J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16(3), 289–326.CrossRefGoogle Scholar
  40. Phillips, P. C., & Shi, S.-P. (2018). Financial bubble implosion and reverse regression. Econometric Theory, 34(4), 705–753.CrossRefGoogle Scholar
  41. Phillips, P. C., & Yu, J. (2011). Dating the timeline of financial bubbles during the subprime crisis. Quantitative Economics, 2, 455–491.CrossRefGoogle Scholar
  42. Phillips, P. C. B., Shi, S., & Yu, J. (2015). Testing for multiple bubbles: Historical episodes of exuberance and collapse in the S&P 500. International Economic Review, 56(4), 1043–1078.CrossRefGoogle Scholar
  43. Phillips, P. C. B., Wu, Y., & Yu, J. (2011). Explosive behavior in the 1990s Nasdaq: When did exuberance escalate asset values? International Economic Review, 52(1), 201–226.CrossRefGoogle Scholar
  44. Rozeff, M. S., & Kinney, W. R. (1976). Capital market seasonality: The case of stock returns. Journal of Financial Economics, 3(4), 379–402.CrossRefGoogle Scholar
  45. Shiller, R. J. (2014). Speculative asset prices. American Economic Review, 104(6), 1486–1517.CrossRefGoogle Scholar
  46. Zeng, Y. (2016). Institutional investors: Arbitrageurs or rational trend chasers. International Review of Financial Analysis, 45, 240–262.CrossRefGoogle Scholar

Copyright information

© Springer Nature Switzerland AG 2021

Authors and Affiliations

  1. 1.Graduate School of Economics and ManagementTohoku UniversitySendai-cityJapan

Personalised recommendations