Transformations  in
Business & Economics

Are Real Estate Inflation Hedges Affected by Risk Asymmetry in Taiwan Metropolitan Areas?
Kuan-Min Wang

ABSTRACT. This paper examines whether, from 1991 to 2006, the risk asymmetry of the real estate market of the Taiwan and its four major metropolitan areas (Taipei City, Taipei County, Taichung City, and Kaohsiung City), affected unexpected inflation hedges. The asymmetric EGARCH-M model is used for this examination. It is found that the real estate returns in Taiwan, including Taipei City and Taichung City, are unable to hedge unexpected inflation while the estimated returns in Taipei County and Kaohsiung City can hedge unexpected inflation partially. Besides Taipei County and Kaohsiung City, the asymmetric leverage effect of real estate return risks is found in other regions too. So, from the viewpoint of hedging unexpected inflation, the metropolitan areas, which suffer less shock from bad news than from good news, can partially hedge unexpected inflation. On the other hand, the forward forecasting test found that during the Asian financial crisis in 1997, there was a structural change in real estate return risks in Taiwan.

KEYWORDS: housing prices, unexpected inflation, leverage effect, EGARCH-M model, structural change, Taiwan.

JEL classification: R11, R21, C53.