Interaction of Housing Market and Stock Market in the U.S. - A Markov Switching Approach

33 Pages Posted: 6 Dec 2017 Last revised: 11 Feb 2019

See all articles by Ming Chu Chiang

Ming Chu Chiang

National Yunlin University of Science and Technology - Department of Finance

Tien Foo Sing

National University of Singapore (NUS) - Department of Real Estate

Long Wang

ShanghaiTech University - School of Entrepreneurship and Management

Date Written: April 15, 2018

Abstract

This paper uses the Markov Switching VAR model to examine the dynamics relationships between stock returns and housing returns in the US covering the periods from 1987 to 2017. The results show significant regime-dependent auto-correlations in stock and housing returns in both the high volatility and the low volatility regimes. The feedback effects are stronger in than housing markets than the stock markets. We observe significant positive cross-market spillovers, which are consistent with the wealth story. Increases in stock return in the low volatility regime create positive spillover effects into housing markets; and likewise, the positive spillovers in the reverse direction from housing market to the stock market occur in the high volatility regime. We also find significant negative correlations between the lagged stock returns and the current housing returns in the high volatility regime, which imply that capital switching occur where investors move their investments out of the housing market into the stock market.

Keywords: Wealth Effect, Capital-Switching Effect, Contagious Effect, Markov Switching Vector Autoregressive Model, Housing Market

JEL Classification: R3, A1, C22

Suggested Citation

Chiang, Ming Chu and Sing, Tien Foo and Wang, Long, Interaction of Housing Market and Stock Market in the U.S. - A Markov Switching Approach (April 15, 2018). Available at SSRN: https://ssrn.com/abstract=3072091 or http://dx.doi.org/10.2139/ssrn.3072091

Ming Chu Chiang

National Yunlin University of Science and Technology - Department of Finance ( email )

Douliu City
Taiwan

Tien Foo Sing

National University of Singapore (NUS) - Department of Real Estate ( email )

4 Architecture Drive
Singapore 117566
Singapore

Long Wang (Contact Author)

ShanghaiTech University - School of Entrepreneurship and Management ( email )

No.393 Middle Huaxia Road
Pudong district
Shanghai, AK Shanghai 210201
China

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