Essays on the U.S. Housing Market and the Credit Market
This dissertation includes three chapters. The first two chapters focus on the U.S. housing market and the credit market and the third chapter emphasizes interest rate cycles and stock market cycles in the U.S.
Chapter 2 proposes a dynamic factor model to study the U.S. housing market and the credit market separately in the last decades. The model extracts the latent unobserved state representing each market from an array of key related variables. The extracted factor from each market is compared to business cycles and to changes in monetary policy as represented by fluctuations in interest rates. I find that, firstly, there are strong correlations between the housing market, the credit market and business cycles. Secondly, these two markets are connected to changes in interest rates.
Chapter 3 connects the housing market and the credit market by extending Chapter 2. This chapter uses a dynamic two-factor model to study housing market and credit market fluctuations, and their interrelationships during the recent U.S. financial crisis. I investigate whether other variables play an important role in explaining the recent crisis. The two-factor model is estimated in a unified framework, taking into consideration the role of loosening and/or tightening of loan standards in the last decades. The results indicate strong correlations between the housing market, the credit market, business cycles, and interest rates. Moreover, loosening or tightening of loan standards has significant impacts on these two markets, especially in the last decade.
Chapter 4 models interest rate cycles and their relationship with financial cycles. A nonlinear two-state Markov switching model is used to obtain different regimes in interest rate cycles and in stock market cycles. Turning points for each cycle is established and the analysis of their lead-lag relationships is examined. The results indicate that there are strong connections between interest rate cycles, stock market cycles and business cycles. In particular, I find that the stock market enters a bear market phase at around the same time that the interest rate enters a high phase which is signaling the possible beginning of an economic recession.