We embed non-fundamental house price expectation shocks and endogenous mortgage defaults into a DSGE model with a housing and banking sector. We use our DSGE set-up to study the impact of variations in house price expectations upon macroeconomic dynamics and their implications for monetary and macroprudential policies. Model simulations show that an increase in expected future house prices leads to a decline in mortgage defaults and interest rates on loans, whereas it leads to an increase in house prices, household debt, bank leverage ratios and economic activity. Interestingly, a positive fundamental housing preference shock causes a rise in inflation, whilst a positive non-fundamental shock to house prices generates a decline in inflation. We demonstrate that even though monetary policy reacting to household credit growth improves the stability of the real economy, yet it jeopardizes price stability. Finally, we show that the effectiveness of monetary versus macroprudential policy depends on whether the economy is affected by non-fundamental or fundamental shocks.

We investigate the asymmetric relationship between returns and implied volatility for 20 developed and emerging international markets. In particular we examine how the sign and size of return innovations affect the expectations of daily changes in volatility. Our empirical findings indicate that the conditional contemporaneous return-volatility relationship varies not only based on the sign of the expected returns but also upon their magnitude, according to recent results from the behavioral finance literature. We find evidence of an asymmetric and reverse return-volatility relationship in many advanced, Asian, Latin-American, European and South African markets. We show that the US market displays the highest reaction to price falls, Asian markets present the lowest sensitivity to volatility expectations, while the Euro area is characterized by a homogeneous response both in terms of direction and impact. These results may be safely attributed to cultural and societal characteristics. An extensive quantile regression analysis demonstrates that the detected asymmetric pattern varies particularly across the extreme distribution tails i.e., in the highest/lowest quantile ranges. Indeed, the classical feedback and leverage hypotheses appear not plausible, whilst behavioral theories emerge as the new paradigm in real-world applications.