The Source of Nonlinear Linkage between U.S. Housing Returns and the Federal Funds Rate

This study examines nonlinear variation of U.S. housing market and volatility spillover of the federal funds rate onto housing returns. The discrete wavelet transform is used to decompose the frequency-aggregated raw data into the series at three different frequencies. The existence of plausible volatility effect is investigated by performing EGARCH-filtered nonlinear causality tests in the time-frequency domain. The estimation of a BEKK-MGARCH model reveals the existence of volatility transmission effects at a high frequency, characterized by cyclical periodicity of a two-year horizon or less. It implies that interest rate movement is closely related to housing transaction behavior in the short run. Evidence of strong volatility spillover also provides significant information flows between housing returns and the interest rate.