From systematic to systemic risk among G7 members: Do the stock or real estate markets matter?

• The time-varying connectedness is used to measure stock and housing market systematic risks. • The time-varying Granger-causality is employed to monitor the causal relationships between stock and housing market systematic risks over time. • Using quarterly G7 data over a long period covering 1970–2021, the empirical results indicate that these systematic risks both are very volatile. • The dominant source of causality in the housing systematic risk implies that policies directed against the possibility of a housing bubble. Stock and housing market systematic risk may be a critical ingredient in the precipitation of systemic risk and hence a financial crisis. However, surprisingly few studies have so far explored the role of their contagion in triggering systemic risk. In this paper, time-varying connectedness is used to measure two-market systematic risks and time-varying Granger-causality is employed to monitor their causal interactions over time. Using quarterly G7 data over a long period covering 1970–2021, our results indicate that these systematic risks both are very volatile. Moreover, the dominant source of causality in the housing systematic risk implies that policies directed against the possibility of a housing bubble, for example, macroprudential toolkits, deserve special emphasis. Finally, given that the duration of the bilateral causality coincides with those in past crises, a dynamic probit model reveals that adopting an expansionary monetary policy with a huge reduction in interest rates may greatly increase the likelihood of a financial crisis.