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The co-movement and causality between the U.S. housing and stock markets in the time and frequency domains

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  • Li, Xiao-Lin
  • Chang, Tsangyao
  • Miller, Stephen M.
  • Balcilar, Mehmet
  • Gupta, Rangan

Abstract

This study applies wavelet analysis to examine the relationship between the U.S. housing and stock markets over the period 1890–2012. Wavelet analysis allows the simultaneous examination of co-movement and causality between the two markets in both the time and frequency domains. Our findings provide robust evidence that co-movement and causality vary across frequencies and evolve over time. Examining market co-movement in the time domain, the two markets exhibit positive co-movement over recent decades, except for 1998–2002 when a high negative co-movement emerged. In the frequency domain, the two markets correlate with each other mainly at low frequencies (longer term), except in the second half of the 1900s as well as in 1998–2002, when the two markets correlate at high frequencies (shorter term). In addition, we find that the causal effects between the markets in the frequency domain occur generally at low frequencies (longer term). In the time-domain, the time-varying nature of long-run causalities implies structural changes in the two markets. These findings provide a more complete picture of the relationship between the U.S. real estate and stock markets over time and frequency, offering important implications for policymakers (and practitioners).

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  • Li, Xiao-Lin & Chang, Tsangyao & Miller, Stephen M. & Balcilar, Mehmet & Gupta, Rangan, 2015. "The co-movement and causality between the U.S. housing and stock markets in the time and frequency domains," International Review of Economics & Finance, Elsevier, vol. 38(C), pages 220-233.
  • Handle: RePEc:eee:reveco:v:38:y:2015:i:c:p:220-233
    DOI: 10.1016/j.iref.2015.02.028
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    Keywords

    Stock market; Housing market; Wavelet analysis; Frequency domain; Time domain;

    JEL classification:

    • C49 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Other
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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