Publications - Stig Vinther Møller

Search and Predictability of Prices in the Housing Market

Møller, S. V., Pedersen, T. Q., Montes Schütte, E. C., Timmermann, A. — Sun, 01 Jan 2023 14:35:59 +0100

House Price Bubbles under the COVID-19 Pandemic

Hansen, J. H., Møller, S. V., Pedersen, T. Q., Montes Schütte, E. C. — Sat, 01 Jan 2022 14:35:59 +0100

We analyze bubble formations in house prices under the covid-19 pandemic in 382 metropolitan areas in the U.S. with a special attention to the role of population density. We use a robust sieve-bootstrap version of the right-tailed unit root test procedure to identify periods of explosiveness in price-rent ratios across metro areas when controlling for fundamentals such as mortgage debt financing costs and the wealth of households. The bubble tests reveal evidence of explosive house prices during the covid-19 pandemic but with important cross-area differences. In contrast to earlier bubble episodes, we find that the frequency and size of bubble formations under the pandemic have been stronger in low-density metro areas compared to high-density metro areas.

The Role of the Discount Rate in Investment and Employment Decisions

Møller, S. V., Priestley, R. — Wed, 01 Mar 2023 14:35:59 +0100

Time variation in the discount rate affects investment and employment decisions in a manner consistent with Q-theory predictions. This evidence is uncovered when using cyclical consumption as a proxy for the discount rate. The results, which are consistent across both U.S. and international data, suggest that firms respond rationally to variations in the cost of capital and that the discount rate has a substantial impact on macroeconomic dynamics and hence business cycle fluctuations.

The Yield Spread and Bond Return Predictability in Expansions and Recessions

Andreasen, M. M., Engsted, T., Møller, S. V., Jensen, M. D. S. — Tue, 01 Jun 2021 14:35:59 +0200

This paper uncovers that expected excess bond returns display a positive correlation with the slope of the yield curve (i.e., yield spread) in expansions but a negative correlation in recessions. We use a macro-finance term structure model with different market prices of risk in expansions and recessions to show that a very accommodating monetary policy in recessions is a key driver of this switch in return predictability.

Consumption Fluctuations and Expected Returns

Atanasov, V., Møller, S. V., Priestley, R. — Wed, 01 Jan 2020 14:35:59 +0100

This paper introduces a novel consumption-based variable, cyclical consumption, and examines its predictive properties for stock returns. Future expected stock returns are high (low) when aggregate consumption falls (rises) relative to its trend and marginal utility from current consumption is high (low). We show that the empirical evidence ties consumption decisions of agents to time variation in returns in a manner consistent with asset pricing models based on external habit formation. The predictive power of cyclical consumption is not confined to bad times and subsumes the predictability of many popular forecasting variables.

Negative house price co-movements and US recessions

Christiansen, C., Eriksen, J. N., Møller, S. V. — Mon, 01 Jul 2019 14:35:59 +0200

We investigate the relation between large negative house price co-movements in the cross-section of US cities and the national business cycle. The occurrences of large negative house price co-movements across cities cluster over time and these clusters are closely linked to NBER recession dates. A simple co-movement measure that aggregates large negative city-level house price returns reliably predicts future recession periods. Weighting cities according to population or GDP when constructing the negative co-movement variable yields the largest forecasting power, indicating that larger cities that contribute more to the national GDP are more influential in terms of correctly signalling future recessions. Moreover, large negative house price co-movements contribute above and beyond traditional recession predictors, suggesting an important role for city-level housing information as an early warning indicator.

A new index of housing sentiment

Bork, L., Møller, S. V., Pedersen, T. Q. — Wed, 01 Apr 2020 14:35:59 +0200

We propose a new measure for housing sentiment and show that it accurately tracks expectations of future house price growth rates. We construct the housing sentiment index using partial least squares on household survey responses to questions about buying conditions for houses. We find that housing sentiment explains a large share of the time variation in house prices during both boom and bust cycles, and it strongly outperforms several macroeconomic variables typically used to forecast house prices. History: Accepted by Tyler Shumway, finance. Funding: Financial support was received from the Danish Council of Independent Research [Grant DFF 4003-00022] and CREATES, Center for Research in Econometric Analysis of Time Series [Grant DNRF78], funded by the Danish National Research Foundation.

Forecasting US Recessions

Christiansen, C., Eriksen, J. N., Møller, S. V. — Sun, 01 Jan 2017 14:35:59 +0100

We study the role of sentiment variables as predictors for US recessions. We combine sentiment variables with either classical recession predictors or common factors based on a large panel of macroeconomic and financial variables. Sentiment variables hold vast predictive power for US recessions in excess of both the classical recession predictors and the common factors. The strong importance of the sentiment variables is documented both in-sample and out-of-sample.

Dividends, earnings, and predictability

Møller, S. V., Sander, M. . — Sun, 01 Jan 2017 14:35:59 +0100

We show that the dividend yield and earnings yield jointly are strong predictors of dividend growth. We motivate the joint specification with a theoretical model and show how omitting the earnings yield biases the dividend yield coefficient towards zero, explaining why the dividend yield by itself is a poor predictor of dividend growth. Our empirical results are robust in pre- and post-war U.S. data, in recessions and expansions, in international data, and when controlling for additional predictors.

A New Index of Housing Sentiment

Bork, L., Møller, S. V., Pedersen, T. Q. — Mon, 14 Nov 2016 14:35:59 +0100

We propose a new measure for housing sentiment and show that it accurately tracks expectations about future house price growth rates. We construct the housing sentiment index using partial least squares on household survey responses to questions about buying conditions for houses. We …find that housing sentiment explains a large share of the time-variation in house prices during both boom and bust cycles and it strongly outperforms several macroeconomic variables typically used to forecast house prices.

Housing price forecastability: A factor analysis

Møller, S. V., Bork, L. — Mon, 01 Jan 2018 14:35:59 +0100

We examine U.S. housing price forecastability using principal component analysis (PCA), partial least squares (PLS) and sparse PLS (SPLS). We incorporate information from a large panel of 128 economic time series and show that macroeconomic fundamentals have strong predictive power for future movements in housing prices. We find that (S)PLS models systematically dominate PCA models. (S)PLS models also generate significant out-of-sample predictive power over and above the predictive power contained by the price–rent ratio, autoregressive benchmarks and regression models based on small datasets.

Bond Market Asymmetries across Recessions and Expansions: New Evidence on Risk Premia

Andreasen, M. M., Engsted, T., Møller, S. V., Jensen, M. D. S. — Mon, 05 Sep 2016 14:35:59 +0200

This paper provides new evidence on bond risk premia by conditioning the classic Campbell-Shiller regressions on the business cycle. In expansions, we find mostly positive intercepts and negative regression slopes, but the results are completely reversed in recessions with negative intercepts and positive regression slopes. We reproduce these coefficients in a term structure model with business cycle dependent loadings in the market price of risk. This model also predicts excess returns in the right direction during expansions and recessions, whereas the Gaussian affine term structure model predicts excess returns for medium- and long-term bonds with the wrong sign during recessions.

Global economic growth and expected returns around the world: The end-of-the-year effect

Møller, S. V., Rangvid, J. — Mon, 01 Jan 2018 14:35:59 +0100

Global economic growth at the end of the year strongly predicts returns from a wide spectrum of international assets, such as global, regional, and individual-country stocks, FX, and commodities. Global economic growth at other times of the year does not predict international returns. Low growth in the global economy at the end of the year predicts higher returns over the following year. It also predicts the global business cycle. When global economic growth at the end of the year is low, investors expect a worsening of the global business cycle and increase their required returns.

Forecasting house prices in the 50 states using Dynamic Model Averaging and Dynamic Model Selection

Bork, L., Møller, S. V. — Thu, 01 Jan 2015 14:35:59 +0100

We examine house price forecastability across the 50 states using Dynamic Model Averaging and Dynamic Model Selection, which allow for model change and parameter shifts. By allowing the entire forecasting model to change over time and across locations, the forecasting accuracy improves substantially. The states in which housing markets have been the most volatile are the states in which model change and parameter shifts have been needed the most.

End-of-the-year economic growth and time-varying expected returns

Møller, S. V., Rangvid, J. — Thu, 01 Jan 2015 14:35:59 +0100

Cross-sectional consumption-based asset pricing: A reappraisal

Engsted, T., Møller, S. V. — Thu, 01 Jan 2015 14:35:59 +0100

Consumer confidence or the business cycle

Møller, S. V., Nørholm, H., Rangvid, J. — Wed, 01 Jan 2014 14:35:59 +0100

Answer: The business cycle.
We show that consumer confidence and the output gap both excess returns on stocks in many European countries: When the output gap is positive (the economy is doing well), expected returns are low, and when consumer confidence is high, expected returns are also low. Consumer confidence and the output gap are also highly positively correlated. In fact, we find that consumer confidence does not contain independent information (i.e. information over and above that contained by the output gap) about expected returns. Our use of European data allows us to examine both aggregate European and local-country data on consumer confidence and output gaps. We find that even local-country consumer confidence does not contain independent information about expected returns. Our findings have asset pricing implication: We show taht the cross-country distribution of expected returns is better captured when using the European output gap as a risk factor.

Forecasting US Recessions

Christiansen, C., Eriksen, J. N., Møller, S. V. — Wed, 01 Jan 2014 14:35:59 +0100

GDP growth and the yield curvature

Møller, S. V. — Wed, 01 Jan 2014 14:35:59 +0100

This paper examines the forecastability of GDP growth using information from the term structure of yields. In contrast to previous studies, the paper shows that the curvature of the yield curve contributes with much more forecasting power than the slope of yield curve. The yield curvature also predicts bond returns, implying a common element to time-variation in expected bond returns and expected GDP growth.

Bond return predictability in expansions and recessions

Engsted, T., Møller, S. V., Jensen, M. D. S. — Thu, 25 Apr 2013 14:35:59 +0200

We document that over the period 1953-2011 US bond returns are predictable in expansionary periods but unpredictable during recessions. This result holds in both in-sample and out-of-sample analyses and using both univariate regressions and combination forecasting techniques. A simulation study shows that our tests have power to reject unpredictability in both expansions and recessions. To judge the economic significance of the results we compute utility gains for a meanvariance investor who takes the predictability patterns into account and show that utility gains are positive in expansions but negative in recessions. The results are also consistent with tests showing that the expectations hypothesis of the term structure holds in recessions but not in expansions. However, the results for bonds are in sharp contrast to results for stocks showing that stock returns are predictable in recessions but not in expansions. Thus, our results indicate that there is not a common predictive pattern of stock and bond returns associated with the state of the economy.

End-of-the-year economic growth and time-varying expected returns

Møller, S. V., Rangvid, J. — Thu, 25 Oct 2012 14:35:59 +0200

We show that macroeconomic growth at the end of the year (fourth-quarter or December) strongly predicts the returns of the aggregate market, small- and large-cap stocks, portfolios sorted on book-to-market and dividend yields, bond returns, and international stock returns, whereas economic growth during the rest of the year does not predict returns. End-of-the-year economic growth rates contain considerably more information about expected returns than standard variables used to predict returns, are robust to the choice of macro variables, and work in-sample, out-of-sample, and in subsamples. To explain these results, we show as the second main fi…nding of our paper that economic growth and growth in economic confidence (consumer con…dence and business con…dence) are strongly correlated during the fourth quarter, but not during the other quarters. In summary, we therefore show that when economic growth is low at the end of the year, confi…dence in the economy is also low such that investors require higher future returns. During the rest of the year, there are no such relations between growth, confi…dence, and returns.

Housing price forecastability: A factor analysis

Bork, L., Møller, S. V. — Mon, 04 Jun 2012 14:35:59 +0200

We examine US housing price forecastability using a common factor approach based on a large panel of 122 economic time series. We find that a simple three-factor model generates an explanatory power of about 50% in one-quarter ahead in-sample forecasting regressions. The predictive power of the model stays high at longer horizons. The estimated factors are strongly statistically signi…cant according to a bootstrap resampling method which takes into account that the factors are estimated regressors. The simple three-factor model also contains substantial out-of-sample predictive power and performs remarkably well compared to both autoregressive benchmarks and computational intensive forecast combination models.

Cross-sectional consumption-based asset pricing: The importance of consumption timing and the inclusion of severe crises

Engsted, T., Møller, S. V. — Sat, 01 Jan 2011 14:35:59 +0100

By using a beginning-of-period timing convention for consumption, and by including the Great Depression years in the analysis, we show that on annual data from 1926 to 2009 a standard contemporaneous consumption risk model goes a long way in explaining the size and value premiums in cross-sectional data that include both the Fama-French portfolios and industry portfolios. A long run consumption risk variant of the model also produces a high cross-sectional …t. In addition, the equity premium puzzle is signi…cantly reduced in the models. We argue that in evaluating consumption based models, it is important to include both boom and crises periods, i.e. periods with severe consumption declines as well as periods with strong growth, and that the standard post-war data sample may not be well suited in this respect.

Habit-based asset pricing with limited participation consumption

Møller, S. V., Bach, C. — Sat, 01 Jan 2011 14:35:59 +0100

We calibrate and estimate a consumption-based asset pricing model with habit formation using limited participation consumption data. Based on survey data of a representative sample of American households, we distinguish between assetholder and non-assetholder consumption, as well as the standard aggregate consumption series commonly used in the CCAPM literature. We show that assetholder consumption outperforms non-assetholder and aggregate consumption data in explaining bond returns, bond yields, and the volatility of bond yields. We further show that the high volatility of assetholder consumption enables the model to explain the equity premium puzzle and the risk-free rate puzzle simultaneously for a reasonable value of relative risk aversion.

Habit formation, surplus consumption and return predictability

Engsted, T., Hyde, S., Vinther Møller, S. — Fri, 01 Jan 2010 14:35:59 +0100

On an international post World War II dataset, we use an iterated GMM procedure to estimate and test the Campbell and Cochrane (1999, By force of habit: a consumption-based explanation of aggregate stock market behavior. Journal of Political Economy 107, 205–251.) habit formation model with a time-varying risk-free rate. In addition, we analyze the predictive power of the surplus consumption ratio for future stock and bond returns. We find that, although there are important cross-country differences and economically significant pricing errors, for the majority of countries in our sample the model gets empirical support in a variety of different dimensions, including reasonable estimates of risk-free rates. Further, for the majority of countries the surplus consumption ratio captures time-variation in expected returns. Together with the price-dividend ratio, the surplus consumption ratio contains significant information about future stock returns, also during the 1990s. In addition, in most countries the surplus consumption ratio is also a powerful predictor of future bond returns. Thus, the surplus consumption ratio captures time-varying expected returns in both stock and bond markets.

Habit persistence

Vinther Møller, S. — Thu, 01 Jan 2009 14:35:59 +0100

This paper uses an iterated GMM approach to estimate and test the consumption based habit persistence model of Campbell and Cochrane (1999) on the US stock market. The empirical evidence shows that the model is able to explain the size premium, but fails to explain the value premium. Further, the state variable of the model - the surplus consumption ratio - explains counter-cyclical time-varying expected returns on stocks. The model also produces plausible low real risk-free rates despite high relative risk aversion.

An Iterated GMM Procedure for Estimating the Campbell-Cochrane Habit Formation Model, with an Application to Danish Stock and Bond Returns

Engsted, T., Møller, S. V. — Fri, 01 Jan 2010 14:35:59 +0100

We suggest an iterated GMM approach to estimate and test the consumption based habit persistence model of Campbell and Cochrane, and we apply the approach on annual and quarterly Danish stock and bond returns. For comparative purposes we also estimate and test the standard constant relative risk-aversion (CRRA) model. In addition, we compare the pricing errors of the different models using Hansen and Jagannathan's specification error measure. The main result is that for Denmark the Campbell-Cochrane model does not seem to perform markedly better than the CRRA model. For the long annual sample period covering more than 80 years there is absolutely no evidence of superior performance of the Campbell-Cochrane model. For the shorter and more recent quarterly data over a 20-30 year period, there is some evidence of counter-cyclical time-variation in the degree of risk-aversion, in accordance with the Campbell-Cochrane model, but the model does not produce lower pricing errors or more plausible parameter estimates than the CRRA model.

Consumption growth and time-varying expected stock returns

Vinther Møller, S. — Tue, 01 Jan 2008 14:35:59 +0100

When the consumption growth rate is measured based upon fourth quarter data, it tracks predictable variation in future excess stock returns. Low fourth quarter consumption growth rates predict high future excess stock returns such that expected returns are high at business cycle troughs and low at business cycle peaks. The consumption growth rate loses predictive power when it is measured based upon other quarters. This is consistent with the insight of Jagannathan and Wang [2007. Journal of Finance 62, 1623-1661] that investors tend to review their consumption and investment plans during the end of each calendar year, and at possibly random times in between. The consumption growth rate measured based upon fourth quarter data is a much stronger predictive variable than benchmark predictive variables such as the dividend-price ratio, the term spread, and the default spread.