Interactions Between Housing Market and Stock Market in the United States: A Markov Switching Approach

Ming-Chu Chiang, Tien Foo Sing and Long Wang

Journal of Real Estate Research, 2020, vol. 42, issue 4, 552-571

Abstract: This study uses the Markov switching vector autoregressive model (MSVAR) model to examine dynamic relationships between stock and housing market returns in the United States covering the period from 1987 to 2017. The results show significant regime-dependent auto-correlations in stock and housing returns in both the high volatility and low volatility regimes studied. The feedback effects are stronger in the housing market than the stock market. We observe significant positive cross-market spillovers, consistent with the wealth story. Increases in stock returns in low volatility regimes create positive spillover effects into housing markets; likewise, positive spillovers in the reverse direction from housing market to stock market occur in high volatility regimes. We also find significant negative correlations between lagged stock returns and current housing returns in the high volatility regime, which implies that capital switching occurs as investors move their investments out of the stock market and into the housing market. In this manner, the housing market becomes a hedge against a volatile stock market.

Date: 2020
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DOI: 10.1080/08965803.2020.1837604

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