Abstract
This paper examines the dynamic relationship that exists between the US real estate and S&P 500 stock markets between the years of 1972 to 1998. This is achieved by conducting both linear and nonlinear causality tests. The results from these tests provide a number of interesting observations which primarily show linear relationships to be spuriously affected by structural shifts which are inherent within the data. Linear test results generally show a uni-directional relationship to exist from the real estate market to the stock market. However, these results are not consistent with financial theory and for all sub-samples of the data. In contrast, the nonlinear causality test shows a strong unidirectional relationship running from the stock market to the real estate market, and is consistent in the presence of any structural breaks.
Similar content being viewed by others
References
Ambrose, B., E. Ancel, and M. Griffiths. (1992). “The Fractal Structure of Real Estate Investment Trust Returns: A Search for Evidence of Market Segmentation and Nonlinear Dependency,” Journal of the American Real Estate and Urban Economics Association 20, 25-54.
Baek, E., and W. Brock. (1992). “A General Test for Nonlinear Granger Causality,” Working Paper. Iowa State University and University of Wisconsin, Madison.
Case, B., W. Goetzmann, and K. Rouwenhorst. (1999). “Global Real Estate Markets-Cycles and Fundamentals,” Working Paper. Yale University.
Chen, N. F., R. Roll, and S. Ross. (1986). “Economic Forces and the Stock Market,” Journal of Business 59, 383-404.
Denker, M., and G. Keller. (1983). “On U-Statistics and Von Mises Statistics forWeakly Dependent Processes,” Zetschrift fur Wahrscheinlichkeistheorie und Verwandte Gebiete 64, 505-522.
Dickey, D. A., and W. A. Fuller. (1981). “Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root,” Econometrica 49, 1057-1072.
Engle, R. F., and C.W. J. Granger. (1987). “Co-integration and Error Correction: Representation, Estimation, and Testing,” Econometrica 35, 251-276.
Geltner, D. (1990). “Return Risk and Cashflow Risk with Long Term Riskless Leases in Commercial Real Estate,” Journal of the American Real Estate and Urban Economics Association 18, 377-402.
Goetzmann, W., and S. Wachter. (1996). “The Global Real Estate Crash-Evidence from an International Data Base,” Working Paper. Yale University.
Goodman, A. C. (1978). “Hedonic Prices, Price Indices and Housing Markets,” Journal of Urban Economics 5, 471-484.
Goodman, A. C. (1981). “Housing Submarkets Within Urban Areas: Definitions and Evidence,” Journal of Regional Science 21, 175-185.
Gyourko, J., and D. Keim. (1992). “What Does the Stock Market Tell Us About Real Returns,” Journal of the American Real Estate Finance and Urban Economics Association 20(3), 457-486.
Hiemstra, C., and J. Jones. (1994). “Testing for Linear and Nonlinear Granger Causality in the Stock Price-Volume Relation,” Journal of Finance 49, 1639-1664.
Liu, C., and J. Mei. (1992). “The Predictability of Returns on Equity Reits and Their Co-movements with Other Assets,” Journal of Real Estate Finance and Economics 5, 401-418.
Liu, C. H., D. J. Hartzell, W. Greig, and T. V. Grissom. (1990). “The Integration of the Real Estate Market and the Stock Market: Some Preliminary Evidence,” Journal of Real Estate Finance and Economics 3, 261-282.
Miles, M., R. Cole, and D. Guikey. (1990). “A Different Look at Commercial Real Estate Returns,” Journal of the American Real Estate and Urban Economics Association 18, 403-430.
Okunev, J., and P. Wilson. (1997). “Using Nonlinear Tests to Examine Integration Between Real Estate and Stock Markets,” Real Estate Economics 25, 487-503.
Quan, D., and S. Titman. (1999). “Do Real Estate Prices and Stock Prices Move Together? An International Analysis,” Real Estate Economics 27, 183-207.
Schnare, A., and R. Struyk. (1976). “Segmentation in Urban Housing Markets,” Journal of Urban Economics 3, 146-166.
Zeckhauser, S., and R. Silverman. (1983). “Rediscover Your Company's Real Estate,” Harvard Business Review 61, 111-117.
Zivot, E., and D. Andrews. (1992). “Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis,” Journal of Business and Economic Statistics 10, 251-270.
Author information
Authors and Affiliations
Rights and permissions
About this article
Cite this article
Okunev, J., Wilson, P. & Zurbruegg, R. The Causal Relationship Between Real Estate and Stock Markets. The Journal of Real Estate Finance and Economics 21, 251–261 (2000). https://doi.org/10.1023/A:1012051719424
Issue Date:
DOI: https://doi.org/10.1023/A:1012051719424