Home Value and Equity Co-Movement: A Dynamic Approach for G-7 Countries

Abstract

Executive Summary. Although both housing and stock values have been studied for their impacts on consumer spending, as well as their effects on financial institutions, capital spending, and the macroeconomy, there have been few studies on how the two assets co-move. In this study, I apply the dynamic conditional correlation (DCC) generalized autoregressive conditional heteroscedasticity (GARCH) model to housing and stock values in the G-7 countries (except Japan, where time series properties inhibit parameter convergence). I find that correlations increased sharply after the 2007 crisis, and that co-movement spiked during the recessions of the 1980s. This indicates that the financial turmoil of a contraction pushes returns on the two assets closer together (and down). Real estate investors and other financial institutions with exposure to both markets will want to prepare and set capital and liquidity standards with the potential for such a “double hit” in mind.