Asymmetric causality between the U.S. housing market and its stock market: Evidence from state level data

Previous research that investigated the link between the U.S. housing market and its stock market concentrated on the wealth effect by assuming the stock prices to be another determinant of house prices. However, the meltdown of housing market and its subsequent impact on the stock market and the U.S. economy in 2008 pointed to causal relation that could run from housing market to stock market. When we tested this hypothesis using state level data, we found short-run symmetric causality from stock prices to house prices in 10 states and from house prices to stock prices in 20 states. However, when we engaged in asymmetric causality, these numbers increased to 25 and 41 respectively. Surprisingly, in 39 out of 41 states in which house prices caused stock prices, it was decline in house prices that caused stock prices, supporting the events of 2008 as well as asymmetric impacts. We also found cointegration of the two markets in more than half of the states.