Real Estate Prices and Stock Market Returns in Germany: Analysis Based on Hedonic Price Index

Real estate and stocks are the main assets in an investor‘s portfolio. It is essential to investigate the long-run relationship between the real estate and the stock market regarding risk diversification in a portfolio. This thesis examines the long-run relationship between residential real estate prices and stock market returns for the case of Germany for the period of 2005-2017 by applying econometrics techniques for time series. To this aim, the thesis uses Hedonic Price Index as a proxy for real estate prices and DAX30 as a proxy for stock market returns. Moreover, three additional variables, namely consumer confidence, credit availability and supply of mortgage loans are incorporated as control variables to assess the robustness of the results. Obtained empirical results indicate a long-run relationship between stock market returns and real estate prices which suggests that in long-run there is no diversification benefit from allocating stock and real estate assets in a portfolio.