Asset price fluctuations in Taiwan: evidence from stock and real estate prices 1973 to 1992

This paper studies the observed price fluctuations from 1973 to 1992 of two major assets in Taiwan: real estate and stocks. Equity prices are found to Granger-cause real estate prices. I then ask under which transmission channel do Taiwan’s asset prices play a more important role. Bank loans are found to be much more significant than interest rates in predicting the movements of both asset prices. This suggests that Taiwan’s asset price fluctuations support the theory that emphasizes the importance of balance sheet position and collateral value to credit-constrained firms. Finally, an experimental simulation suggests that even the rational bubble theory cannot fully explain the acceleration of asset prices during mid-1988 and 1990:Q1.