Step Interventions and Market Integration: Tests in the Us, UK and Australian Property Markets

Abstract

Market integration implies the existence of some long run equilibrium relationship between/amongst markets in such a way that the movements in one market are transmitted to movements in the other/s. It is an interesting observation of much of the literature regarding a possible relationship between real estate and stock markets that there is relatively scant attention given to the possible existence of structural breaks and the impact that such breaks may have on tests for market integration. In this paper we examine the issue of whether the stock markets and real estate markets are stationary or nonstationary in the presence of structural breaks. We adopt the techniques of Perron (1989), Zivot and Andrews (1992) and Perron and Vogelsang (1992). The Zivot- Andrews and Perron-Vogelsang techniques supported market segmentation by showing that the relevant series were integrated to different orders at varying breakpoints (hence implying that the series could not be cointegrated). The results also support the notion that property and equity markets are not integrated internationally. These outcomes, therefore, suggest that there may be risk reduction benefits to be derived from diversification across property and equity markets both domestically and internationally.

JEL Classification: R31