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Using Non-Linear Tests to Examine Integration Between Real Estate and Equity Markets

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Author Info
John Okunev
Pat Wilson

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Abstract

In this study we present an alterntive approach to test whether the real estate and equity markets are cointegrated. We develop a nonlinear test which allows for a stochastic trend term as opposed to a deterministic drift term. This is a reasonable approach, because if the real estate market is related to the equity market then it is desirable to incorporate the stochastic nature of the equity market into the model. We compare the results of the nonlinear model to the results obtained using conventional cointegration tests. The cointegration results supports the view that the real estate and equity markets are segmented, whereas the nonlinear model support the view that the markets are fractionally intgrated. A possible reason for this apparent dicrepancy between the results could be due to the underlying assumption of a linear relationship between the variables for the cointegration. It is possible that the tests of cointegration will reject that the two variables are related even though the relationship may be nonlinear.

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File URL: http://www.business.uts.edu.au/finance/research/wpapers/wp47.pdf
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Publisher Info
Paper provided by School of Finance and Economics, University of Technology, Sydney in its series Working Paper Series with number 47.

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Length: 22 pages
Date of creation: 01 Sep 1995
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Handle: RePEc:uts:wpaper:47

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  1. Elias Oikarinen, 2006. "Price Linkages between Stock, Bond and Housing Markets - Evidence from Finnish Data," Discussion Papers 1004, The Research Institute of the Finnish Economy. [Downloadable!]
  2. James E. Payne & Hassan Mohammadi, 2004. "The transmission of shocks across real estate investment trust (REIT) markets," Applied Financial Economics, Taylor and Francis Journals, vol. 14(17), pages 1211-1217, November. [Downloadable!] (restricted)
  3. Cotter, John & Stevenson, Simon, 2005. "Multivariate Modeling of Daily REIT Volatility," MPRA Paper 3524, University Library of Munich, Germany. [Downloadable!]
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  4. Cotter, John & Stevenson, Simon, 2004. "Uncovering Volatility Dynamics in Daily REIT Returns," MPRA Paper 3533, University Library of Munich, Germany, revised 2005. [Downloadable!]
  5. Perry, L.J. & Wilson, P.J., 2001. "The Accord and Strikes: An International Perspective," Economics Working Papers wp01-03, School of Economics, University of Wollongong, NSW, Australia. [Downloadable!]
    Other versions:
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