An empirical study on the information transmission among national APT trading and rental markets
Authors:   Asia-Europe Perspective Association, Hong Chung-Hyo 
Published: June 2018

This study tests the dynamic interrelationship between trading and rental prices of real estate markets in Korea using the monthly data from January, 1, 1986 to December, 31, 2011. For this purpose we employ both Granger causality test and impulse response analysis based on the vector autoregressive model. Considering the co-integration relationship between national and Gangnam province apartment trading and rental price index, we incorporate the error correction term into the VAR model. The main empirical results are as follows.
First, we estimated whether the level variables and returns of national and Gangnam province apartment trading and rental price index are stationary or not. For this we make us of the ADF(Augmented Dickey-Fuller) and PP(Phillips Perron) which is used frequently in financial econometrics areas. According to the unit root test results, there is a unit root in the level variables but not in the returns of national and Gangnam province apartment trading and rental price index.
Second, we also studied whether there is a co-integration relationship among the level variables in the national and Gangnam province apartment trading and rental price index. For this, we employ Johansen co-integration test. According to the empirical results, we find that there is a co-integration relationship between national and Gangnam province apartment trading and rental price index with a statistically significant level.
Third, in order to the short-run information transmission between national and Gangnam province apartment trading and rental price index, we estimated Granger causality test based on VECM(1) model. We selected lag one(1) based on estimates of bayesian information criteria. According to the Granger causality test, we find that the national apartment trading market has an impact on the change of the national apartment rental market with a statistically significant lever, but not vice versa. In case of Gangnam province’s real estate market, there is a bilateral impact between the trading and rental market but the impact of trading market to rental market is relatively more strong than that of rental market to trading market with statistically significant levels. We also estimated the impact of Gangnam province’s real estate market to national market and the empirical result showed that both the trading and rental market of Gangnam province have an impact on the national market with the statistically significant levels.
Fourth, we estimated the impulse response analysis based on VECM(1) to study the persistence of impact between trading and rental market in national and Gangnam province real estate markets. The empirical results show that national apartment rental price reply instantly the new impact took placed in national apartment trading market and this influence persist more than 10 period. National trading market also shows similar response on the news from national rental market. We also find that the trading and rental markets of Gangnam have a strong influence on the national trading and rental markets more than 10 period, but Gangnam's apartment trading index's influence are more dominant.
From these empirical results we infer that the change in apartment trading price in national and Gangnam province have much more information than those of rental market prices. We hope these kinds of empirical results would be helpful for the policy maker and investors to set up investment and risk management strategies.