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Causal relationship between asset prices and output in the US: Evidence from state-level panel Granger causality test

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Author Info

  • Furkan Emirmahmutoglu

    ()
    (Department of Econometrics, Gazi University, Turkey)

  • Nicholas Apergis

    ()
    (Department of Banking and Financial Management, University of Piraeus, Greece)

  • Beatrice D. Simo-Kengne

    ()
    (Department of Economics, University of Pretoria)

  • Tsangyao Chang

    ()
    (Department of Finance, Feng Chia University, Taichung, Taiwan)

  • Rangan Gupta

    ()
    (Department of Economics, University of Pretoria)

Abstract

This paper investigates the causal relationship between asset prices and per capita output across 50 US states and the District of Columbia over 1975 to 2012. A bootstrap panel Granger causality approach is applied on a trivariate VAR comprising of real house prices, real stock prices and real per capita personal income (proxying output), which allows us to account not only for heterogeneity and cross-sectional dependence, but also for interdependency between the two asset markets. Empirical results reveal the existence of a unidirectional causality running from both asset prices to output. This confirms the leading indicator property of asset prices for the real economy, while also substantiating the wealth and/or collateral transmission mechanism. Moreover, the absence of reverse causation from the personal income per capita to both housing and stock prices tend to suggest that non-economic fundamentals may have played an important role in the formation of bubbles in these markets.

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Bibliographic Info

Paper provided by University of Pretoria, Department of Economics in its series Working Papers with number 201411.

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Length: 30 pages
Date of creation: Mar 2014
Date of revision:
Handle: RePEc:pre:wpaper:201411

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Keywords: House prices; stock prices; output; granger causality;

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  1. M. Hashem Pesaran & Aman Ullah & Takashi Yamagata, 2008. "A bias-adjusted LM test of error cross-section independence," Econometrics Journal, Royal Economic Society, vol. 11(1), pages 105-127, 03.
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  6. Beatrice D. Simo-Kengne & Rangan Gupta & Manoel Bittencourt, 2012. "THE IMPACT OF HOUSE PRICES ON CONSUMPTION IN SOUTH AFRICA: EVIDENCE FROM PROVINCIAL-LEVEL PANEL VARs," Working Papers 201211, University of Pretoria, Department of Economics.
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  12. M. Hashem Pesaran, 2004. "Estimation and Inference in Large Heterogeneous Panels with a Multifactor Error Structure," CESifo Working Paper Series 1331, CESifo Group Munich.
  13. Granger, Clive W. J., 2003. "Some aspects of causal relationships," Journal of Econometrics, Elsevier, vol. 112(1), pages 69-71, January.
  14. Emirmahmutoglu, Furkan & Kose, Nezir, 2011. "Testing for Granger causality in heterogeneous mixed panels," Economic Modelling, Elsevier, vol. 28(3), pages 870-876, May.
  15. Norman Miller & Liang Peng & Michael Sklarz, 2011. "House Prices and Economic Growth," The Journal of Real Estate Finance and Economics, Springer, vol. 42(4), pages 522-541, May.
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