Analyzing the Causality and Dependence between Exchange Rate and Real Estate Prices in Boom-and-Bust Markets: Quantile Causality and DCC Copula GARCH Approaches

Abstract

Unlike most previous studies examining the causal relationship and dependence between exchange rates and real estate prices, this study aims to investigate the causal relationship and dependence between these two variables in a boom-and-bust market setting using the panel quantile Granger causality and dynamic conditional correlation (DCC) copula GARCH approaches, respectively. In the panel quantile Granger causality test, quantiles 0.1 and 0.9 are considered to represent extreme markets (bust and boom, respectively). Our first results showed the causal effects at extreme quantiles to be very different from those at the median quantile. We also found a greater causality between house prices and exchange rates in the boom market compared to the bust market. In the second model, we explored the relationship between exchange rates and real estate prices, taking boom-and-bust dynamics into account by measuring the tail dependence through the DCC copula GARCH method. Our findings confirm the strong time-varying tail dependence between house prices and exchange rates. The degree of tail dependence was quite stable over the sample period, except for the periods around 1997–1998 and 2008–2009, when the degree of tail dependence was stronger and less persistent. These two periods correspond to the two great financial crises in Asia and the USA, respectively.

Keywords

• OECD
• house price
• exchange rate
• quantile Granger causality
• DCC copula GARCH Model