Trading frictions and house price dynamics

Andrew Caplin, John Leahy

    Research output: Contribution to journalArticle

    Abstract

    We model liquidity in housing markets. The model provides a simple characterization for the joint process of prices, sales, and inventory. We compare the implications of the model to certain properties of housing markets. The model can generate the large price changes and the positive correlation between prices and sales that we see in the data. Unlike the data, prices are negatively autocorrelated and high inventory predicts price appreciation. We investigate several amendments to the model. Informational frictions show promise.

    Original languageEnglish (US)
    Pages (from-to)283-303
    Number of pages21
    JournalJournal of Money, Credit and Banking
    Volume43
    Issue numberSUPPL. 2
    DOIs
    StatePublished - Oct 1 2011

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    Keywords

    • House prices
    • Liquidity
    • Trading frictions
    • Trading volume

    ASJC Scopus subject areas

    • Accounting
    • Finance
    • Economics and Econometrics

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