Abstract
Previous studies commonly use a linear framework to investigate the long-run equilibrium relationship between the housing and stock markets. The linear approaches may not be appropriate if adjustments from disequilibrium are asymmetric in both markets. Nonlinear adjustments are likely to be observed since the two markets respond rather differently to negative shocks where the stock market is more volatile but price rigidity is found in the housing market. In this paper, we firstly propose two hypotheses on the long-run equilibrium relationship of the US housing and stock markets, and then employ the threshold cointegration model to investigate the potential asymmetric relationships between the two markets. Our empirical results reveal that cointegration exists among the markets, but adjustments toward its long-run equilibrium are asymmetric. Further evidence points out that a rapid mean reversion occurs in one regime where the stock price outperforms the housing price, and no significant reversion is found in the other regime, supporting the hypothesis of the existence of an asymmetric wealth effect among the two markets in the US. Furthermore, evidence from the asymmetric vector error correction model shows that significant error corrections toward the equilibrium exist in the short run only when the stock price exceeds the real estate price by the estimated threshold level, reassuring the finding of the asymmetric wealth effect.
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Notes
GJR-GARCH model is one kind of T-GARCH model.
Okunev et al. (2002) studied the correlation between the housing and stock markets in Australia from 1980 to 1999 with linear and non-linear Granger causality tests. Results showed that structural changes create unstable linear relationship between the housing and stock markets. The non-linear causality test strongly indicated that the stock market in Australia has a one-way effect on the housing market.
This study used three types of M-TAR models. In the Model 1, residual error did not have serial correlation. In the Model 2, residual error had first-order serial correlation. The Model 3 used the efficient threshold value.
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Tsai, IC., Lee, CF. & Chiang, MC. The Asymmetric Wealth Effect in the US Housing and Stock Markets: Evidence from the Threshold Cointegration Model. J Real Estate Finan Econ 45, 1005–1020 (2012). https://doi.org/10.1007/s11146-011-9304-5
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DOI: https://doi.org/10.1007/s11146-011-9304-5