Abstract
In this paper, we infer that when no excess monetary liquidity exists, people tend to invest available capital in assets associated with a high return or low risk. However, when excess monetary liquidity occurs, capital may successively boost asset markets, and the stock market wealth is thus likely to spill into housing markets, resulting in bubbles in these two markets and therefore in the unsustainable development of both the housing and stock markets. This paper uses relevant data from the United Kingdom from January 1991 to March 2020 to verify whether excess monetary liquidity is a crucial factor determining the relationship between the housing and stock markets. Continuous and structural changes are found to exist between housing price and stock price returns. This paper employs the time-varying coefficient method for estimation and determines that the influence of stock price returns on housing returns is dynamic, and an asymmetrical effect can occur according to whether excess monetary liquidity exists. An excessively loose monetary policy increases asset prices and can thus easily result in a mutual rise in asset markets. By contrast, when excess monetary liquidity does not exist, capital transfer among markets can prevent autocorrelation during excessive market investment and thereby aggravate market imbalance.
Highlights
Monetary policy is often used to stimulate the macroeconomy and intervene in the capital market
When excess monetary liquidity occurs, capital may successively boost asset markets, and the stock market wealth is likely to spill into housing markets, resulting in a wealth effect that is positively related to housing and stock price returns
Many recent studies have offered evidence indicating that the wealth effect exists in housing and stock markets in China, and a number of previous studies have indicated that monetary policy or “hot money” may influence the prices of both asset types simultaneously (Sousa, [44]; Guo and Huang, [21])
Summary
Monetary policy is often used to stimulate the macroeconomy and intervene in the capital market. Previous studies have analyzed the relationship between these two markets for the following four main purposes: (1) to discuss the correlation between the two markets on the basis of portfolios (Brounen and Eichholtz, [4]); (2) to analyze the possible market-related changes caused by financial crises (Kallberg et al, [5]); (3) to compare market characteristics (Hui et al, [6]; Tsai et al, [7]); and (4) to explore some other rarely discussed matters, such as finding evidence of a long co-memory (Wilson and Okunev, [8]). This paper furthers previous studies on housing and stocks markets, proposes a new viewpoint, and focuses on analyzing and verifying the role that excess monetary liquidity plays in asset–market correlation. When excess monetary liquidity occurs, capital may successively boost asset markets, and the stock market wealth is likely to spill into housing markets, resulting in a wealth effect that is positively related to housing and stock price returns.
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