Using Nonlinear Tests to Examine Integration Between Real Estate and Stock Markets

An alternative approach to test whether the real estate and stock markets are cointegrated is presented. A nonlinear test, which allows for a stochastic trend term as opposed to a deterministic drift term, is developed. The results of the nonlinear model are compared to the results obtained using conventional cointegration tests. The cointegration results support the view that the real estate and stock markets are segmented, whereas the nonlinear model supports the view that the markets are fractionally integrated. There is a nonlinear relationship between the stock and real estate markets, but movement of the real estate market towards the stock market is slow and divergence between the two markets can be prolonged. Copyright American Real Estate and Urban Economics Association.