This research attempts to judge the reality of the price index without incorporating the prices of stock and real estate and to analyze the efficiency of the diversification when investing in both assets of stock and real estate over the period of 1986Q1 to 2002Q3 in Taiwan by employing various multivariate VAR models. The empirical results first indicate that diversification by investing in both assets of stock and real estate is fruitless since the market is efficient. Granger causality tests provide us perceptual information that the price index without incorporating the prices of stock and real estate is spurious. Nonetheless, the formulating of a STECM is not necessary since the linear functional form is not violated in our examination.
