Fractional Integration and Volatility Transmission Between Real Estate and Stock Markets: Novel Evidence from a FIGARCH-BEKK Approach

This paper examines the non-linear integration between the real estate and stock market for a series of developed markets namely UK, Germany, Australia, Hong-Kong, Japan, Singapore and the US. The period of analysis covers different market phases for these countries. We examine the volatility dynamics of the real estate and stock market in the UK and Germany within a novel FIGARCH-BEKK model. Our results reveal evidence of a common long-term fractional integration between real estate and stock market for these two countries. Moreover, when there is a lower common order of fractional integration, there might also be a significant bilateral or unilateral volatility spillover effect between real estate and stock market. Robustness tests confirm the consistency of the FIGARCH-BEKK model even during the global financial crisis. Additional tests capture the existence of volatility spillovers and fractional integration in the rest of countries (Australia, Hong-Kong, Japan, Singapore and the US) under examination. Our findings entail significant implications for investors and policy makers.