How do government policies impact dynamic linkages between China’s stock and real estate markets?

Abstract

This study investigates impacts of polices on dynamic linkages between the Chinese stock and real estate markets between June 2010 and November 2016. By using the Generalized Autoregressive Conditional Heteroscedastic (GARCH) model, we find that in recent years the linkages have become more volatile with a series of opening-up policies in the stock market and housing purchase restrictions in the real estate market. Furthermore, the results show that the wealth effect, credit-price effect, and investment portfolio theory contribute to explaining the changes in the linkages. In general, policy implementation that attracts external capital increases aggregate demand and thus prices, reinforcing positive linkages through wealth and credit-price effects. By contrast, if policy implementation is aimed at stabilizing one market, allocating more assets to another market is more profitable. As a result, negative linkages are strengthened, consistent with the notion of the investment portfolio theory. With increasing international capital inflows, the market fluctuations are more volatile and the dynamic linkages between the two markets become crucial, not only for investors seeking to adjust investments but also for policy makers in curbing excessive volatility.

Keywords:

• stock market
• real estate market
• policy and regulation
• market linkage
• GARCH model