Proceedings of 4th Global Business and Finance Research Conference
25 - 27 May 2015, Marriott Hotel, Melbourne, Australia
ISBN: 978-1-922069-76-4
Housing Prices, Stock Prices and the U.S. Economy
Kamal P. Upadhyaya*, Dharmendra Dhakal and Franklin G. Mixon, Jr.
This paper studies the relationship between housing prices, stock prices, interest rates and
the output level in the U.S. economy using monthly data from 1993 to 2014. In absence of
monthly GDP data industrial price index is used for aggregate output and for stock price
Dow Jones Industrial Average index is used. Ten year treasury yield rate is used for the
interest rate. Since all four variables seem to be interdependent with each other a VAR
model is developed. To ensure the data series are stationary unit root tests are conducted.
The test results suggest that the data series are I(1) therefore the first difference form of
the data is used.
Before estimating the VAR model Granger causality tests are conducted to identify the
direction of causality between each pair of variables. The Granger causality test result
suggests existence bi-directional causality between output and stock price, interest rate
and stock price, and interest rate and housing price. But between output to housing
price, and interest rate only one directional causality running from output to housing price
and interest rate is detected.
Variance decompositions (VDCs) results suggest that 93 percent variation in IP (output) is
explained by its innovation in first quarter (period 3) and 70 percent in 4th quarter (period
12). Out of remaining 30 percent variations in period 12, HP (housing price) accounts
about 6.5 percent of variation, SP (stock price) accounts about 21.5 percent variation and
interest rate explains about 2 percent respectively. The findings suggest that the effect of
housing price on the U.S economy is not nearly as large as it is expected. Instead, the
wealth effect created by the stock prices changes has bigger effect.
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Prof. Kamal P. Upadhyaya*, Corresponding author, Professor of Economics, Department of Economics,
University of New Haven, West Haven, CT 06516, USA, Tel: (203) 932 – 7487
E-mail: kupadhyaya@newhaven.edu
Prof. Dharmendra Dhakal, Professor of Finance, Department of Economics and Finance, Tennessee State
University, Nashville, TN 37209, USA, Tel: (615)963 – 7345, E-mail: ddhakal@tnstate.edu
Prof. Franklin G. Mixon, Jr., Professor of Economics, Center for Economic Education, D. Abbott Turner
College of Business, Columbus State University, 422 Columbus, GA 31907, USA,
E-mail: mixon_franklin@columbusstate.edu