Portfolio diversification possibilities between the stock and housing markets in G7 countries: Evidence from the time-varying Granger causality

Abstract

Stock and housing assets are the most important forms of wealth held by households and firms and so how to reduce their portfolio risk is a major concern. However, modern financial markets are characterized by a significant degree of fluctuations. We therefore propose a new time-varying Granger causality model (Shi et al., 2020) to monitor a time-dependent relationship between stock and housing prices in G7 member countries over the 1970–2021 period. Although no evidence of causality, namely the two-market segmentation is found in the UK, unidirectional causality may reveal informational content from one market to the other in the cases of Canada, Italy Japan and the USA, while a bi-directional relationship points to perfect integration in France and Germany before the launch of the euro. To sum up, there is a large amount of evidence to prove that this new causal method can assist in the allocation of a dynamic portfolio over time.