Should the optimal portfolio be region-specific? A multi-region model with monetary policy and asset price co-movements

Abstract

Abstract:A multi-region, dynamic stochastic general equilibrium (MRDSGE) model is built to show that differences in the price elasticity of housing supply can be related to stylized facts on regional differences in (1) house price level, (2) house price volatility, (3) monetary policy propagation mechanism and (4) household asset portfolio. In addition, regional house prices are found to move more closely with regional fundamentals than with the national GDP. The correlation between the national stock price and the regional housing price also vary significantly across regions, which suggests that optimal portfolio should be region specific. JEL Classification Numbers: E32, E52, R10, R33

Availability, Affordability and Volatility: The Case of Hong Kong Housing Market

“…We thus use the monthly real estate data from 1993 to 2011 and calculate the supply elasticity of the Hong Kong housing market as 0.76 and its house price volatility as 8.37%. Based on Leung and Teo's (2011) estimation, an American city with a supply elasticity of 0.76 would be associated with a volatility is 7.90%, which is close to the actual house price volatility of Hong Kong. 46 Figure 12 shows that if Hong 41 Thus, our result is also consistent with the findings of Karabarbounis and Neiman (2013) regarding major economies.…”

“…For example, like many American cities, Hong Kong has high levels of maturity and transparency, and a large listed real estate market. 45 Interestingly, Hong Kong fits reasonably well in the statistical relationship identified by Leung and Teo (2011). We thus use the monthly real estate data from 1993 to 2011 and calculate the supply elasticity of the Hong Kong housing market as 0.76 and its house price volatility as 8.37%.…”

“…42 For example, Leung and Teo (2011) note that differences in supply elasticities 43 can be used to explain the differences in house price volatility. In particular, they find that supply elasticity is negatively and significantly related to housing volatility in major U.S. cities.…”

“…In Leung and Teo (2011), they estimate the relationship between supply elasticity and house price volatility. They found that Standard deviation (in %) = 10.63 -3.60 * Supply Elasticity (6.34) (-3.10)…”

Risk diversification gains from metropolitan housing assets

“…The issue has received attention in the recent housing research. For example, Leung and Teo () suggest that optimal portfolios are region‐specific under a dynamic stochastic general equilibrium model. McDuff () proposes a home‐price correlation as a measure of demand substitutability for MSA‐level housing assets to show hedging demand substitutions across multiple MSA‐level housing markets.…”