Foreign Ownership of Stocks and Long-run Interdependence Between National Housing and Stock Markets-Evidence from Finnish Data

Elias Oikarinen

Online First™, 24 March 2009

Abstract

Globalization of the financial markets may have undermined co-movement between stock and housing markets, at least in small open economies. This paper provides an empirical study on the long-term dynamic interrelation between stock and housing markets in a small open economy with special attention to the effect of foreign investors on the dynamics. The empirical findings, based on a quarterly dataset from Finland over 1970-2006, do not support the hypothesis of diminished co-movement between Finnish stock and housing markets after the abolishment of the foreign ownership restrictions of stocks in 1993. The markets still appear to be tightly interdependent in the long run. Nevertheless, the results suggest that the substantial growth in the foreign ownership of Finnish stocks induced a large and long-lasting deviation from the cointegrating long-run relation between stock and housing prices. The results also imply that diversification between stock and housing markets works the worse the longer the investment horizon is.Keywords  Housing – Stocks – Co-movement – Cointegration – Diversification

JEL classification  G10 – G11

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