Stock and Residential Property Price in Emerging Markets of India and China: ‘Wealth’ Versus ‘Credit-Price’ Effect

Proceedings of The 6th International Conference on Management, Economics and Finance

Year: 2023



Stock and Residential Property Price in Emerging Markets of India and China: ‘Wealth’ Versus ‘Credit-Price’ Effect

Koon Nam Henry Lee




Using quarterly data, this study aims to investigate the cointegration and causality relationships between residential property price and stock price in two biggest emerging market economies, China, and India. The cointegration and causality test used are the Autoregressive distributed lagged (ARDL) cointegration (bounds testing) approach of Pesaran et al. (2001) that based on the estimation of an unrestricted error correction model (UECM) and the Granger et al. (2000) non causality test. The stock price indexes are represented by the data series of total share price for all shares for India and China, whereas the house prices in the two biggest emerging markets are based on the followings: 1/. China house price is based on the second-hand house price index, Shanghai. 2/. India house price is based on Reserve Bank of India house price index. The empirical results of ARDL cointegration tests running from stock price to property price and vice versa provide strong evidence to support the hypothesis that the stock price and property price are cointegrated. Hence, the results confirm the bilateral causal relationship between stock and property prices in China and India. The results of Granger (2000) non- causality tests provide evidence of wealth effect and credit price effect for China; however, the causality results support only the credit price effect in India. Finally, the causality results based on the ARDL ECM model indicate the feedback causality between the stock and residential property price for China. This admits the possibility of persistent spiral upturns in both prices in China.

keywords: Emerging Markets, ARDL cointegration, Wealth effect, Credit Price effect, Permanent income hypothesis