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
Date Written: April 15, 2018
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: Suggested Citation