From systematic to systemic risk among G7 members: Do the stock or real estate markets matter?

Stock and housing market systematic risk may be a critical ingredient in the precipitation of systemic risk and hence a financial crisis. However, surprisingly few studies have so far explored the role of their contagion in triggering systemic risk. In this paper, time-varying connectedness is used to measure two-market systematic risks and time-varying Granger-causality is employed to monitor their causal interactions over time. Using quarterly G7 data over a long period covering 1970-2021, our results indicate that these systematic risks both are very volatile. Moreover, the dominant source of causality in the housing systematic risk implies that policies directed against the possibility of a housing bubble, for example, macroprudential toolkits, deserve special emphasis. Finally, given that the duration of the bilateral causality coincides with those in past crises, a dynamic probit model reveals that adopting an expansionary monetary policy with a huge reduction in interest rates may greatly increase the likelihood of a financial crisis.