Long- and Short-Run Relationships between House and Stock Prices in South Africa: A Nonparametric Approach

Abstract

This paper provides empirical evidence on the long- and short-run relationships between real house and stock prices of South Africa. Standard linear tests may not detect the existence of these relationships between time series especially in the presence of structural shifts or regime changes, which, in turn, may cause nonlinearities in the observed series. Thus, in this study, both linear and nonparametric cointegration and Granger causality tests were conducted. Results from the linear cointegration test showed no long-run relationship between house and stock prices. The linear Granger causality test produced no evidence of causality either. In contrast, the nonparametric cointegration test revealed a long-run one-to-one relationship between the two series, with the nonparametric Granger causality test indicating a bi-directional causality. Therefore, stability in the housing market drives stability in the equity market and vice versa. © 2013 American Real Estate Society.