Evidence of cross-asset contagion in U.S. markets

- We apply the Granger causality test and VARs to examine the change in causality structure
- Most cross-asset contagion effects are from bond market to equity market.
- Investing in REIT and money markets offers diversification benefits during a crisis.
- Holding U.S. dollars and equity at the same time during a crisis period is not beneficial.
- We provide more rewarding asset reallocating strategies for investors to benefit from diversification.

This study examines evidence of cross-asset contagion among REIT, money, stock, bond, and currency markets in the US from 2006 to 2012, which covers the subprime and European sovereign debt crisis. We apply the Granger causality test and a vector auto-regression to examine the change of causality structure. Our results show that contagion exists from medium-term bond markets to equity markets; REIT, money markets and short-term bond markets show little evidence of cross-asset contagion with other markets; and the currency market shows high co-movement and contagion with equity markets. Our findings provide more rewarding asset reallocating strategies for the investors who invest in both bond and equity markets before a crisis to consider reallocating their portfolio into REIT and money markets to benefit from diversification during a crisis period.