Correlations in Regional Property Markets Including Spillover Effect of Economic Policy Uncertainty

Abstract

In regional economic problems, understanding the property market is a momentous task due to its importance in the whole economic industrial chain. The property markets in different regions are interconnected, thus studying the correlations is imperative to the management and investment. It is intuitively known that the property market should be altered by the economic policy uncertainty (EPU), which has spillover among different regions. However, the effect from the spillover of EPU on the property markets has not been considered in previous literatures. Therefore, in this paper, we construct a framework that uses a generalized vector autoregressions model to produce a spillover index of EPU and then interpolates this index matrix to a dynamic conditional correction GARCH model. Using this model, empirical regression on the property indices and EPU indices evidences that the spillover of EPU has significant effect on the correlations of property markets. This analysis indicates that the regional property markets that have large spillover of EPU shows strong comovement, that is, high contagion effect. The findings imply the importance of putting enough vigilance to the spillover of EPU from external economies for the managers and investors of property markets.