POSITIVE FEEDBACK TRADING AND DIFFUSION OF ASSET PRICE CHANGES - EVIDENCE FROM HOUSING TRANSACTIONS

The positive feedback hypothesis states that good news (bad news) enge nders positive (negative) attitudes that accentuate the impact of the news on asset prices. It is a special case of the representativeness h euristic which states that there is a general tendency to overemphasiz e the most recent evidence. This paper tests a form of the positive fe edback hypothesis where recent rates of change in asset prices become important information used by decision-makers. If this is the case, ho using price changes will tend to diffuse throughout a metropolitan are a. Evidence from Hartford, Connecticut supports this hypothesis and th e evidence is inconsistent with alternative explanations.