The Impacts of Extreme Events of Dynamic Interactions on Interest Rate, Real House Price and Stock Markets

Abstract

This study investigates the possible impact of various events among interest rate, real house price and stock market dynamic interactions on the United States. We used dynamic conditional correlation (DCC) analysis, a multivariate GARCH method, with monthly US data from 1973 to 2008. We consider the dynamic correlation change among interest rate, real house price and stock market following the Watergate Affair, Iran-Iraq War, Stock Market Crash, Iraq-Kuwait War, Soviet Coup, Asian Financial Crisis, 9/11 Attack, Hurricane Katrina and Sub-Prime Mortgage Crisis. Evidence shows that the correlation between FFR-RHP and FFR-DJIA markets are more responsive to extreme events than other pair-wise markets, probably because the interest rate is often the government`s tool to adjust the economy. In addition, we discovered that the inter-asset coefficients of correlation often have structural changes when an economic event occurs, so investors should make appropriate adjustments in their portfolios.