The dynamic connectedness of UK regional property returns

Abstract

In this study, we examine the network topology of UK regional property returns over the period 1973Q4–2014Q4 using a dynamic measure of connectedness developed by Diebold and Yilmaz (2014). Overall, our findings indicate that the transmission of inter-regional property returns shocks is an important source of regional property return fluctuations. What is more, this is a dynamic, event-dependent process which implies that, over time, any UK region can be both a net transmitter and a net receiver of shocks. This in turn is conducive to evidence that the ripple effect is not the only driving force propelling changes in the UK housing market. In fact, we find that the regions of the South West, Outer South East, East Midlands and Northern Ireland seem to be dominant transmitters of property returns shocks throughout the sample period. We further suggest that additional evidence regarding weak segmentation in the UK may stem from the fact that there is constant interaction across all regions over time. Most interestingly, we show that London may also act as a net-recipient of shocks. Findings are important for policy makers purporting to alleviate regional imbalances and achieve balanced growth, as well as investors who formulate portfolio diversification strategies. Our results exhibit robustness to a series of tests.