Financial Crisis and Co-movements of Housing Sub-markets 68 INTERNATIONAL REAL ESTATE REVIEW 2013 Vol. 16 No. 1: pp. 68 – 118 Financial Crisis and the Co-movements of Housing Sub-markets: Do relationships change after a crisis? Charles Ka Yui Leung. Associate Professor, Department of Economics and Finance, City University of Hong Kong; Address: 83 Tat Chee Avenue, Kowloon Tong, Hong Kong; Phone: (852) 3442-9604; Fax: (852) 3442-0284; E-mail:
[email protected] Patrick Wai Yin Cheung Research Associate, Department of Economics and Finance, City University of Hong Kong; Address: 83 Tat Chee Avenue, Kowloon Tong, Hong Kong; E-mail:
[email protected] Edward Chi Ho Tang PhD Candidate, Department of Economics and Finance, City University of Hong Kong; Address: 83 Tat Chee Avenue, Kowloon Tong, Hong Kong; E-mail:
[email protected] This study of the co-movements of transaction prices and trading volumes reveals that the mean correlation of prices and trading volumes alike, among different housing sub-markets, increase during the market boom. After a financial crisis, the correlations dramatically drop and stay low. The distribution of the correlations changes from skewed to symmetric. All these coincide with the increase in the total variance of prices, as well as the share of the idiosyncratic component in the total variance after the crisis. These findings are consistent with a family of theories that emphasize on the “regime switch” in expectations. Keywords: Financial Crisis; Hedonic Pricing; Structural Break; Evolution of Valuation; Rolling Regression . Corresponding author 69 Leung, Cheung and Tang … In the ruin of all collapsed booms is to be found the work of men who bought property at prices they knew perfectly well were fictitious, but who were willing to pay such prices simply because they knew that some still greater fool could be depended on to take the property off their hands and leave them with profit.