During the late 1980’s, the stock market and real estate market in Taiwan both went into enormous booms. The Taiwan Stock Market Weighted Price Index (TSMWPI) and real estate prices both reach the highest peaks that they never reach before. It seems that there is a certain relationship between the stock market and real estate market. Therefore, this thesis proposes to study the following two propositions: (1) if the stock market and real estate market are integrated, then a certain degree of asset substitution will occur. The price of the assets in the two markets will interacted due to the asset substitution. And this price interaction will reduce the effect of risk diversifying. (2) But if the two markets are segmented, the effect the diversifying risk will get significant increasing as long as having the assets of the two markets included in your portfolio simultaneously.
Past studies commonly investigated the relationship between the price series in these two markets, and therefore make the conclusions of their relationships. However, any individual price series cannot represent the activities of the whole market. Consequently, we adopt the Arbitrage Pricing Model (APM) to examine the relationships between the stock market and the real estate market in Taiwan. Our study is the first one to discuss this topic from the view of the market. Our study also tests causality relationship between the price series, but we have some improvements compared to the past studies. Our model includes an exogenous variable which captures the influence affecting both the stock market and real estate market at the same time. The test of casualty is also based on the cointegration theory.
We test four cities in Taiwan, including the Taipei City, Taipei County, Taichung City and Kaohsiung City. Our findings suggest that the house price of the Taipei City and the Taipei County are co-integrated with the TSMWPI, that is, there is a long-term equilibrium relationship between the two cities and TSMWPI. The test of Granger Causality indicates that TSMWPI only Granger causes the house price of the Taipei City. All other causality relationships are not existed in these four cities. Finally, we use the APM to examine the relationship between the two markets and find that no evidence of relationship is existed between the stock and the housing market, suggesting that the stock market and the housing market in Taiwan are segmented.
Key Words: Real Estate Market, Stock Market, Causality, CAPM