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Portfolio diversification possibilities between the stock and housing markets in G7 countries: Evidence from the time-varying Granger causality

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  • Chen, Chien-Fu
  • Chiang, Shu-hen

Abstract

Stock and housing assets are the most important forms of wealth held by households and firms and so how to reduce their portfolio risk is a major concern. However, modern financial markets are characterized by a significant degree of fluctuations. We therefore propose a new time-varying Granger causality model (Shi et al., 2020) to monitor a time-dependent relationship between stock and housing prices in G7 member countries over the 1970–2021 period. Although no evidence of causality, namely the two-market segmentation is found in the UK, unidirectional causality may reveal informational content from one market to the other in the cases of Canada, Italy Japan and the USA, while a bi-directional relationship points to perfect integration in France and Germany before the launch of the euro. To sum up, there is a large amount of evidence to prove that this new causal method can assist in the allocation of a dynamic portfolio over time.

Suggested Citation

  • Chen, Chien-Fu & Chiang, Shu-hen, 2022. "Portfolio diversification possibilities between the stock and housing markets in G7 countries: Evidence from the time-varying Granger causality," Finance Research Letters, Elsevier, vol. 49(C).
    • Handle: RePEc:eee:finlet:v:49:y:2022:i:c:s1544612322003476
    DOI: 10.1016/j.frl.2022.103124
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