A Non-Linear Model of Causality Between the Stock and Real Estate Markets of European Countries

by Su, Chi Wei and Chang, Hsu Ling and Zhu, Meng Nan
Published in Romanian Journal of Economic Forecasting
, 2011, volume 14 issue 1, 41-53

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Using the threshold auto-regressive (TAR) model, we set out in this study to determine whether any long-run equilibrium relationship exists between the stock and real estate markets of the European countries, with our empirical results revealing that such a long-term relationship does indeed exist under a specific threshold value. We go on to adopt the threshold error-correction model (TECM) to determine whether a similar relationship is discernible between two specific variables and any non-linear forms. The findings clearly point to the existence of long-run unidirectional and bidirectional causality between the real estate market and the stock market in regions both above and below the threshold level. Finally, we find the existence of both wealth and credit price effects in the real estate markets and stock markets of European countries, again both above and below the threshold value, which thereby offers a better interpretation of the meaning of the macroeconomic factors.

Keywords: causality, threshold model, threshold error-correction model (TECM), wealth effect, credit price effect
JEL Classification:
C22, E44, G11