The role of economic policy uncertainty in forecasting housing prices volatility in developed economies: evidence from a GARCH-MIDAS approach

Abstract

Purpose In the past few years, numerous economic uncertainty challenges have occurred globally. These uncertainties grasp the attention of the researchers and they examine the role of economic policy uncertainties in several aspects. Therefore, this study contributes to the literature by exploring the house prices volatility and economic policy uncertainty nexus in G7 countries. Design/methodology/approach The authors applied the newly introduced econometric technique, the GARCH-MIDAS model, to the sample size of January 1998–May 2021. Findings The result shows a significant relationship between house prices volatility and economic policy uncertainty. Moreover, economic policy uncertainty acts as a significant determinant of house prices volatility. In addition, the out-of-sample also shows that the economic policy uncertainty is an effective predictor and the GARCH-MIDAS has a better predictive ability. Originality/value This paper makes a unique contribution to the literature with reference to developed economies, being a pioneering attempt to investigate the GARCH-MIDAS model to analyze the relationship between housing prices volatility and economic policy uncertainty by applying more rigorous and advanced econometric techniques.

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“…In particular, the recent surge in publications on economic uncertainty and property performance is mainly attributable to the COVID-19 pandemic. The convergence of longer forecast horizons, increased digitisation and improved information transmission channels has culminated in a more sustained and intensified focus on this area of research (Christiaens and Macharis, 2021; Fan et al ., 2022; Gupta et al ., 2022; Marfatia et al ., 2022).…”

“…In particular, the recent surge in publications on economic uncertainty and property performance is mainly attributable to the COVID-19 pandemic. The convergence of longer forecast horizons, increased digitisation and improved information transmission channels has culminated in a more sustained and intensified focus on this area of research (Christiaens and Macharis, 2021;Fan et al, 2022;Gupta et al, 2022;Marfatia et al, 2022). Hargitay and Yu (1993) proposed that all investments exist somewhere on a spectrum ranging from absolute uncertainty to absolute certainty, noting that both extremes are improbable in real-world conditions.…”

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