Correlated Risk and Volatility Spillovers across U.S. Regional Housing Markets

Abstract

This paper models the correlated shocks across regional housing markets and the spillover effects in time-varying housing price volatilities. We explore two kinds of diffusion channels: geographic closeness and economic similarity. Our empirical investigation is based on the Case-Shiller housing price indices from 2000 to 2008 for the twenty major U.S. housing markets. The results demonstrate that extra volatility can be caused by shocks in other regions. In particular, we find significant contagion effects during the 2007-2008 subprime crisis and the subsequent financial crisis. We define contagion as structural changes in spatial volatility spillover intensities. Both channels play important roles in risk spreading, but the weight of the economic channel is greater during times of market stress than during normal market conditions. This indicates that shocks have a greater tendency to spread nationwide between economic similar regions during market downturns.

Keywords: Spatial autocorrelation, volatility spillover effects, contagion, dynamic panel estimation, GARCH process

JEL Classification: C21, C23, R15