Mean reversion and momentum: Another look at the price-volume correlation in the real Estate Market

Yuval Arbel, Danny Ben-Shahar*, Eyal Sulganik

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

8 Scopus citations


Based on behavioral finance and economics literature, we construct a theoretical framework in which consumers of newly constructed housing units perceive prices to follow a stochastic mean reversion pattern. Given this belief and the high carrying cost maintained by real estate developers, potential buyers opt to either exercise immediately or defer the purchase. We simulate the model within a real option framework by which we show that the optimal time to wait before exercising a purchase is positively related to the price level; hence, a negative (positive) correlation between transaction volume and price level (yield) emerges. Observing data on housing prices and new construction sales in Israel for the years 1998-2007, we apply an adaptive expectation regression model to test consumers' belief in both mean reversion and momentum price patterns. The empirical evidence shows that while consumers' demand pattern is simultaneously consistent with the belief in both momentum and mean reversion processes, the effect of the latter generally dominates. Moreover, while the data does not allow for testing the volume and price-level correlation, it does provide support to the positive volume-price yield correlation.

Original languageEnglish
Pages (from-to)316-335
Number of pages20
JournalJournal of Real Estate Finance and Economics
Issue number3
StatePublished - 2009
Externally publishedYes


  • Geometrical-lag
  • Mean reversion
  • Momentum
  • Price-volume
  • Real estate
  • Real option


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