In the Shadow of the United States: The International Transmission Effect of Asset Returns

Abstract

We examine how fluctuations in financial and housing markets in U.S. affect asset returns and GDP in Hong Kong. In contrast to the results from linear specifications, which concludes that the U.S. and Hong Kong are virtually delinked in terms of the asset markets, our regime-switching models indicate that the unexpected shock of US stock returns, followed by the TED spread, has the most significant effect on HK asset returns and GDP, typically in the regime with high return and low volatility. For the in-sample one-step-ahead forecasting, US Term spread stands out to be the best predictor.

Booms, Busts, and Normal Times in the Housing Market

“…Chang et al (2011) estimate a regime-switching model which seems to suggest that the monetary policy, the term spread and the housing market return as a system experiences regimeswitch since the mid-1970s. Chang et al (2012Chang et al ( , 2013 further show that a similar regime-switching structure applies not only to the U.S., but also to some Asian countries. Jin et al (2012) argue that when entrepreneurs are subject to collateral constraints, the external …nance premium, the house price, the output and the business investment form a non-trivial dynamic system.…”

Availability, Affordability and Volatility: The Case of Hong Kong Housing Market

“…46 Figure 12 shows that if Hong 41 Thus, our result is also consistent with the findings of Karabarbounis and Neiman (2013) regarding major economies. 42 For instance, see Leung, Cheung, and Tang (2013) Chang et al (2013) for an analysis on how shocks in the U.S. affect the GDP and asset markets in Hong Kong. 45 Among others, see Newell et al (2004) for details.…”

The Nexus between Visitor Arrivals and Residential Property Rents in Hong Kong

“…Craig and Hua (2011) mention that real incomes, real domestic credit, construction costs, land supplies, and real interest rates explain the rapid rise in property prices. Leung and Tang (2012) discuss how financial crises affect real estate markets in Hong Kong, along with Chang, Chen, and Leung (2013) showing that unexpected changes in the United States stock market can cause a significant impact on Hong Kong housing returns using a regime-switching model. Kwan, Leung, and Dong (2015) develop several consumption-based asset pricing models to improve the accuracy of predictions on housing returns.…”