Evaluating Causal Relationships between Stock Returns, Real Estate Markets, and Uncertainty Using Wavelet Decomposition

Several studies have been conducted to examine the relationship between stock market prices, macroeconomic uncertainty, and housing costs. Our study extends the existing literature by employing the wavelet coherency approach to thoroughly examine the correlations and causal relationships among these variables. A novel method is also introduced, combining wavelet decomposition with a vector autoregression model featuring time-varying parameters. This method allows for evaluating the spillover effects of volatility in the time-frequency domain across housing markets. The findings of this study unveil that volatility and exogenous shocks stemming from internationalization concentration have significant spillover effects on local housing markets, particularly in regions that serve as global hubs. Empirical evidence underscores the growing interconnections between stock markets, real estate, and uncertainty, particularly during periods of turbulence. These interactions encompass causation and co-movements and are most pronounced over medium and long timescales. The data-driven insights emphasize the importance of policymakers’ vigilance regarding potential impacts on domestic housing markets resulting from shocks in foreign property markets. The study suggests that macro-prudential policy measures can be vital in mitigating unforeseen repercussions in the housing market, especially when these shocks originate in major financial centers within such internationalized urban areas.