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Advisor(s)
Abstract(s)
Evidence of the asymmetric wealth effect has important implications for investors and
continues to merit research attention, not least because much of the evidence based on linear models
has been refuted. Indeed, stock and house prices are influenced by economic activity and react nonlinearly to positive/negative shocks. This problem justifies our research. The objective of this study
is to examine evidence of cointegrations between the US housing and stock markets and between the
US and European stock markets, given the international relevance of these exchanges. Using data
from 1989:Q1 to 2020:Q2, the Threshold Autoregression model as well as the Momentum Threshold
Autoregression model were calculated by combining the US Freddie, DJIA, and SPX indices and
the European STOXX and FTSE indices. The results suggest a long-term equilibrium relationship
with asymmetric adjustments between the housing market and the US stock markets, as well as
between the DJIA, SPX, and FTSE indices. Moreover, the wealth effect is stronger when stock prices
outperform house prices above an estimated threshold. This empirical evidence is useful to portfolio
managers in their search for non-perfectly related markets that allow investment diversification and
control risk exposure across different assets.
Description
Keywords
Threshold autoregression Financial markets Momentum threshold autoregression Risk Cointegration Asymmetric error correction