Residential property price-stock price nexus in Hong Kong: new evidence from ARDL bounds test

Abstract

Purpose

This study aims to investigate the cointegration and causality relationships between Hong Kong’s residential property price and stock price, using quarterly data, from the 1st quarter of 1980 to the 3rd quarter of 2015.

Design/methodology/approach

In contrast to other studies, the cointegration test used is the autoregressive distributed lag (ARDL) cointegration (bounds testing) approach of Pesaran et al. (2001) that based on the estimation of an unrestricted error correction model and the causality test is based on non-causality test of Granger et al. (2000). Moreover, this research employs recursive least square procedures and Chow (1960) breakpoint test to detect unknown structural break and variation of relationships between residential property and stock price over the whole sample period.

Findings

The results of ARDL cointegration tests running from stock to residential property markets provide strong evidence to support the hypothesis that the stock and residential properties are cointegrated. The results of Granger et al. (2000) non-causality test support the view of wealth effect that stock price has an important causal effect on residential property price in Hong Kong but not vice versa. In addition, the results of recursive ordinary least squares coefficients estimates and Chow (1960) test (breakpoint test) for structural instability confirm the variation of the relationships between stock and residential property markets over the sample period.

Research limitations/implications

The empirical results from cointegration and causality tests suggest that the residential asset returns are better predicted by including the lagged difference values of stock price.

Originality/value

This is the pioneering study to examine the cointegration and causality study of stock and residential property price in Hong Kong by employing Pesaran ARDL cointegration approach and Granger non-causality approach. Investors are able to perform an effective evaluation to assist in allocating investment funds, and the government bodies can implement supplement housing policy in response to the public needs.

Citation

Lee, K.N.H. (2017), "Residential property price-stock price nexus in Hong Kong: new evidence from ARDL bounds test", International Journal of Housing Markets and Analysis, Vol. 10 No. 2, pp. 204-220. https://doi.org/10.1108/IJHMA-03-2016-0020