THE CAUSAL RELATIONSHIP BETWEEN REAL ESTATE AND STOCK MARKETS by JOHN OKUNEV SCHOOL OF BANKING AND FINANCE UNIVERSITY OF NEW SOUTH WALES, SYDNEY

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. When consideration is made for these same breaks in the linear models, which are due to a transition from a medium to low inflationary regime in the late 1980's to early 1990's, it also becomes noticeable that results dramatically change in favour of supporting the nonlinear test results.