Abstract
We analyze the time variation in the average dependence within a set of regional monthly house price index returns in a regime-switching multivariate copula model with a high and a low dependence regime. Using equidependent Gaussian copulas, we show that the dependence of house price returns varies across time with changes in credit market conditions, which reduces the gains from the geographic diversification of real estate and mortgage portfolios. More specifically, we show that a decrease in leverage, measured by the loan-to-value ratio, and to a lesser extent an increase in mortgage rates, are associated with a higher probability of moving to and staying in the high dependence regime.
Original language | English |
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Article number | nbac037 |
Journal | Journal of Financial Econometrics |
Early online date | 28 Dec 2022 |
DOIs | |
Publication status | E-pub ahead of print - 28 Dec 2022 |
Keywords
- Time-varying dependence
- copula
- regime-switching
- diversification
- mortgage
- loan to value