Interactions between Real Estate and Equity Markets: an Investigation of Linkages in Developed and Emerging Countries

This study analyzes the long-run cointegration relationship between equity and real estate prices in 30 developed and emerging economies divided into four subpanels related to the income level and the financial market structure. We test for cointegration between equity and real estate prices using the pooled mean group estimator of the dynamic heterogeneous panel on the entire panel sample and on subpanels in order to isolate the variation of codependencies among country groups. The results suggest equity prices and real estate prices are closely correlated, synchronized and codependent, with the degree of codependencies depending on the income levels and the structure of the financial markets of the given countries. In economies with a market-based financial system and in developed economies, the reaction of both asset prices to economic news is more synchronized when compared to the remaining two groups. The stock market crash and the global financial crisis significantly increased the level of segmentation between the stock markets and the real estate markets, with the segmentation being more pronounced in developed economies.