MARKET EFFICIENCY AND HOUSE PRICE DYNAMICS IN RESIDENTIAL REAL ESTATE MARKETS OF CHINA

Abstract

THE PURPOSE OF THIS PAPER IS TO TEST THE EFFICIENCY OF THE RESIDENTIAL REAL ESTATE MARKET AND GIVE A RATIONAL STORY TO EXPLAIN THE RISING HOUSING PRICES IN CHINA. FIRSTLY, WE TEST THE EFFICIENCY OF THE RESIDENTIAL REAL ESTATE MARKET OF CHINA. THROUGH OBSERVING THE PHENOMENA THAT HOUSING PRICES CANNOT ADJUST TO NEW INFORMATION INSTANTANEOUSLY, WE ILLUSTRATE THAT EVIDENCES DO NOT OBEY THE WEAK-FORM EFFICIENCY, USING AUTOCORRELATION AND FISHER-TYPE UNIT ROOT TEST BASED ON AUGMENTED DICKEY-FULLER (ADF) TEST. MORE SPECIFICALLY, EMPIRICAL RESULTS SUGGEST THAT RESIDENTIAL REAL ESTATE MARKETS IN CHINA ARE INEFFICIENT, AND THE DEGREE OF HOUSING PRICES CANNOT REFLECT TOTAL INFORMATION. FURTHERMORE, WE GAIN FUNDAMENTAL SOLUTIONS FOR HOUSING PRICES AND PRICE-TO-RENT RATIOS USING THE LUCAS TREE MODEL. HOWEVER, IT FAILS TO EXPLAIN THE DRAMATIC FLUCTUATIONS WITNESSED BY ACTUAL DATA. THUS, WE ADD BUBBLE COMPONENTS IN THE ASSET PRICING MODEL, THEREBY SUCCESSFULLY MATCHING THE TREND OF BOTH HOUSING PRIC