Asset Market Correlation and Stress Testing:Cases for Housing and Stock Markets
- Asset Market Correlation and Stress Testing:Cases for Housing and Stock Markets
- Cho, Man; Min, Insik
- time-varying volatility; stress testing; asset market correlation
- Issue Date
- Series/Report no.
- KDI Working Paper Series;10-09
- This study aims to achieve a two-fold research objective: first, to econometrically investigate
hypothesized linkages between real estate and stock markets by fitting different classes of timevarying
volatility model; second, to perform VaR-type stress testing by using the fitted asset price
models. In so doing, we use data from Korea and U.S. so that asset price processes, in terms of mean,
volatility, correlation, can be compared. In the econometric analyses, we estimate both a multivariate
GARCH model that allows contemporaneous and time-varying shock correlations between real estate
and stock markets and an univariate GARCH model that does not allow such correlation. Our results
indicate that housing price volatilities in both countries are highly time-varying, with the Korean asset
markets shown to be more volatile, and that non-consideration of asset market correlation underpredicts
the risk embedded in real estate price dynamics. Policy implications of our findings in regard
to stress testing and other issues are also discussed.
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