Asymmetric Conditional Variance in Housing Prices - Testing for Downward Rigidity

The purpose of this paper is to analyze the volatility dynamics of housing markets in the United Kingdom and the United States in order to determine if market inefficiencies cause downward rigidity in housing prices. We hypothesize that the potential downward rigidity will prevent prices from appropriately adjusting downwards, and that positive shocks in housing prices will increase the conditional variance in the following period more than a corresponding negative shocks. We analyze the conditional variance in the housing prices by employing various autoregressive conditional heteroscedastic (ARCH) models. Our results for the United Kingdom and the United States show that shocks in housing prices have a positively asymmetric effect on the conditional variance in the following period, and that the E-GARCH model is better than the GJR-GARCH model at modeling this asymmetry.