What drives Hong Kong's residential property market—A Markov switching present value model

The property market of Hong Kong is one of the most volatile in the world. This study attempts to investigate the proposition that the Hong Kong residential market is only driven by fundamentals. The investigation is based on a Markov switching present value model, which explicitly accounts for a rational speculative bubble. The estimates show that not only does the model capture the asymmetric market responses to information and noise, but it also gives evidence on investor heterogeneity. The study also finds that the influence of the rational bubble is statistically significant.