Monetary Shocks and REIT Returns *

Transcription

1 Moneary Shocks and REIT Reurns * Paper Presened a he Pacific-Rim Real Esae Sociey Annual Conference, Auckland, New Zealand, January 006 Don Bredin, Universiy College Dublin School of Business, Universiy College Dublin, Blackrock, Couny Dublin, Ireland. don.bredin@ucd.ie Gerard O Reilly, Cenral Bank and Financial Services Auhoriy of Ireland Economic Analysis and Research Deparmen, Cenral Bank and Financial Services Auhoriy of Ireland, PO Box 559, Dame Sree, Dublin, Ireland. gerard.oreilly@cenralbank.ie and Simon Sevenson, Cass Business School, Ciy Universiy Faculy of Finance, Cass Business School, Ciy Universiy, 06 Bunhill Row, London, ECY 8TZ, UK. Tel: , Fax: , s.sevenson-@ciy.ac.uk * The auhors would like o hank seminar paricipans a Cass Business School, Ciy Universiy and he Faculy of Economics & Economerics, Universiy of Amserdam for commens on a previous draf of his paper. Auhor o whom correspondence should be addressed.

2 Moneary Shocks and REIT Reurns Absrac We examine he influence of US moneary policy on Real Esae Invesmen Truss hrough he examinaion of changes in he fed funds fuure rae. This form of analysis allows he isolaion of he unanicipaed componen of Federal Reserve rae changes. In comparison wih many previous sudies of he REIT secor, he resuls show a srong response in boh he firs and second momen of REIT reurns o unexpeced ineres rae movemens. Furher ess are also conduced in relaion o asymmery in he volailiy response and o he calm before he sorm effec commonly observed in he broader sock markes. In neiher case are supporive resuls obained, highlighing differences beween he REIT secor and he general equiy marke.

3 Moneary Shocks and REIT Reurns : Inroducion The imporance of moneary policy changes and he ransmission of informaion conained herein o asse markes has been he subjec of a large number of papers in recen years. This lieraure has exended from examinaions of sensiiviy o marke ineres raes o more deailed examinaions of informaion ransfers conained in moneary policy announcemens and has examined a wide range of asse classes. This paper examines he impac of changes in he main moneary policy insrumen in he Unied Saes, he Federal Funds Rae on Real Esae Invesmen Truss (REITs). The raionale behind he examinaion of REITs is due o heir unique srucure in comparison o mainsream equiies. REITs are he primary raded vehicle for real esae invesmen in he US marke. They are srucured in a similar fashion o muual funds and herefore differ from a sandard corporae srucure due o enhanced ax ransparency. In order for a firm o qualify as a REIT he firm is required o have a minimum of 75% of heir asses in real esae and o pay ou a leas 90% of heir axable earnings as dividends. If hese requiremens are me hen he dividend paymens of he REIT are exemp from corporaion ax. The imporance of hese requiremens and he srucure of REITs in comparison o he broader equiy markes may lead o a differen response in REIT prices o changes in moneary policy. As noed by Bernanke & Kuner (005) he impac of rae changes on he general equiy marke can be viewed as occurring due o hree issues. Firsly, he impac on he expeced level of fuure dividends of he firms, secondly, any associaed change in he real ineres rae used o discoun hese dividends and hirdly changes in he equiy risk premium. Given he characerisics of no only REITs bu also he underlying privae real esae marke a number of aspecs of hese linkages may aken on addiional imporance in he conex of he raded real esae secor. In relaion o he firs poin he 90% dividend payou requiremen will lead o more subsanial income flows from REITs han common socks. However, in addiion, he srucure of he privae real esae marke will also lead o an impac. Moneary policy changes will naurally have an influence on general economic aciviy, which iself will feed hrough o occupaional demand in he underlying real esae marke. This will impac upon he rens obainable by he REIT in heir underlying propery 3

4 porfolio and will hus feed direcly hrough o he dividend paymens of he firm. In addiion, rae changes will have a furher impac on he value of he underlying porfolio. No only will changes in renal income impac on propery values bu furhermore, given he linkages beween he space and capial markes (DiPasquale & Wheaon, 99 and Fisher, 99), here is an impac hrough propery yields (cap raes) on he value of he underlying porfolio. These effecs mean ha REITs are far more heavily ied o heir underlying asse base han boh equiies generally and also oher forms of real esae securiies, such as corporae based vehicles in markes such as he UK and Hong Kong. I also means ha he response of REITs o changes in moneary policy may differ from he general evidence regarding he sock marke. A furher facor ha may also lead o differences in he resuls for REITs in comparison o he overall equiy marke is he relaive size and mauriy of he secor. While REITs were esablished by Congress heir growh has largely occurred since he early nineies. In 99 for example he oal marke capializaion of he equiy REIT secor was according o NAREIT (Naional Associaion of Real Esae Invesmen Truss) $8,785m. As a he end of 005 his had increased o over $300bn, while he number of Equiy REITs had increased from 86 o 5. Amongs oher papers, Coer & Sevenson (006) noe in heir examinaion of REIT volailiy ha his growh in he secor has led, paricularly in recen years, o changes in he dynamics in he secor. However, while subsanial growh has occurred he secor does sill comprises of largely small and mid cap firms, wih an average size of jus under $bn. Our mehodological approach draws on he recen work of Bomfim (003), Jones e al. (998) and Anderson and Bollerslev (998). The ransmission of moneary policy informaion is assessed hrough an analysis of meeings of he Federal Open Marke Commiee (FOMC). As in papers such as Bomfim (003) we proxy marke expecaions concerning changes in he Fed Funds Rae hrough changes in he fed funds fuures rae. The curren draf of he paper examines hree key hypoheses. Firsly we examine he impac of FOMC announcemens on boh he reurns and volailiy of he REIT secor. Specifically, by spliing he rae change ino is anicipaed and unanicipaed componens he analysis allows an examinaion of he impac of unexpeced rae changes. Secondly, we es for asymmery in he response. 4

5 Finally, a specific aspec of REIT volailiy around he ime of FOMC meeings is considered and we invesigae wha is commonly referred o as he calm before he sorm effec. This refers o he fac ha volailiy ends o fall immediaely prior o an announcemen. This effec has been noed by Jones e al. (998), Li & Engle (998) and Bomfim (003) for he Treasury Bond, Treasury Bill and Sock markes respecively. The remainder of he paper is laid ou as follows. The following secion briefly reviews he exising lieraure o have examined boh he specific response of REITs o ineres rae movemens and also he broader lieraure o have invesigaed ineres rae sensiiviy of asses and he ransmission of moneary informaion. Secion 3 deails he mehodological approach and he daa requiremens. Secion 4 conains he main empirical findings and he concluding commens are provided in he final secion. : Lieraure Review The majoriy of empirical sudies o have analyzed he relaionship beween REITs and ineres raes have relied upon examining he relaionship wih marke raes, wih no accouning for he degree o which he change in raes in anicipaed. In addiion, much of his lieraure has ended o examine he issue in he conex of asse pricing and he deerminans of REIT reurns. A number of papers have shown ha he sensiiviy of REITs o ineres raes is boh ime-varying and also dependen on he rae used. Boh Chen & Tzang (988) and Liang e al. (995) find evidence of insabiliy in heir findings dependen on he exac ime period examined. This is evidence ha is suppored by Devaney (00) and He e al. (003). He e al. (003) highligh he imporance of proxies by illusraing he sensiiviy of he resuls according o he ineres rae proxy used. The auhors also find furher evidence concerning he ime-varying naure of he linkages beween ineres raes and real esae securiies. Using a Flexible Leas Squares approach he paper highlighs ha all of he proxies esed have ime-varying characerisics. In addiion, he auhors confirm previous findings showing ha REITs are mos sensiive o changes in longerm yields and low-grade corporae bonds alhough, as wih oher proxies used, hese 5

6 findings are also ime-varying. This is a finding ha is consisen wih he lieraure o have examined financial insiuions (e.g. Kane & Unal, 988). Devaney (00) uilizes a GARCH-M model similar o ha used in he broader ineres rae sensiiviy lieraure such as Elyasiani & Mansur (998). This is one of he few papers o have exended he analysis o examine he impac of ineres raes on REIT volailiy. The resuls illusrae he difference in focus beween he Equiy and Morgage REIT sub-secors. While highly significan findings are repored wih regard o he morgage secor in he case of Equiy REITs while he coefficiens may be of he expeced sign hey are generally insignifican. I should be noed however ha Devaney (00) analyzed monhly daa. A recen paper by Coer & Sevenson (006) examines daily REIT volailiy. While he focus of ha paper is no concerned wih ineres rae sensiiviy, Treasury Bills are incorporaed ino he mulivariae GARCH model used o examine he underlying volailiy dynamics of REITs. The resuls show ha Treasury Bill movemens are significan in erms of boh reurns and volailiy for Equiy REITs. Mos of he exising work on REITs relaionship and ineracions wih ineres raes has broadly followed he sandard mehodological approaches adoped in he broader financial economics lieraure. This radiionally concenraed upon he pure marke sensiiviy of socks o marke ineres rae movemens. An imporan issue arising from his early lieraure and of relevance in he conex of he curren sudy is he base issue ha ineres rae risk is priced 3. In addiion, a number of papers have repored on empirical evidence illusraing he ime-varying naure of he sensiiviy. Yourougou (990) compares periods of relaive sabiliy and volailiy in ineres raes, finding ha during periods of relaive ineres rae sabiliy socks do no display significan sensiiviy. The sabiliy of rae movemens is linked o he exen o which he rae changed is anicipaed. If raes are relaively sable hen even if movemens are no anicipaed hey will generally be of a smaller magniude. However, during periods of enhanced volailiy in ineres raes here will be greaer uncerainy concerning rae movemens and also in all likelihood he magniude of hem. In comparison o his resuls during periods of sabiliy, Yourougou (990) finds ha during periods of relaive volailiy bank socks in paricular do reac significanly o ineres rae movemens. Supporing evidence is also repored by Kwan (99) who 6

7 finds ha bank socks are influenced by unanicipaed shocks o raes. A number of papers in he mid-o-lae nineies exend his issue by no only examining he linkages in he firs momen of boh ineres raes and sock reurns, bu also by looking a he respecive second momens. Flannery e al. (997) repor ha condiional ineres rae volailiy is a significan influence. Elyasiani & Mansur (998) uilized a GARCH-M model on a sample of monhly reurns for 56 US banks. The resuls show ha boh he level and volailiy of ineres raes significanly impac he firs and second momens of bank socks. As he focus of he curren paper is no on marke rae movemens bu raher analyses official rae changes and he decisions of he FOMC, he analysis also links in wih he broader lieraure o have looked ino he impac of macroeconomic variables on equiy markes. Flannery & Proopapadkis (00) examine he effec of announcemens concerning 7 macroeconomic series. Of he 7 series he auhors find evidence ha six (CPI, PPI, a moneary aggregae, balance of rade, employmen and housing sars) are priced. However, only unanicipaed money supply announcemens influence boh he firs and second momen of sock reurns. Connolly & Wang (003) examine he impac of moneary announcemens in an inernaional environmen looking a he US, UK and Japan 4. One ineresing resul from his sudy is evidence supporive of an asymmeric response in erms of wheher he announcemen conained good or bad news. This is a similar finding o ha repored by Bomfim (003) and is consisen wih he leverage effec noed by Black (976). A large lieraure has examined he specific impac of US moneary policy on he equiy markes 5. An imporan issue in any examinaion of rae changes by he Federal Reserve is ha of echnical and non-echnical rae changes. Prior o 979 he Federal Reserve effecively changed he discoun rae o bring i ino line wih marke raes 6. Boh Smirlock & Yawiz (985) and Pearce & Roley (985) provide evidence on he impac of rae changes on he sock marke. Pearce & Roley (985) is one of he firs sudies o spli he rae change ino is expeced and unexpeced componen, in his case hrough he use of survey daa. Pos 979 and he change in rae change policy he auhors show ha sock prices reac significanly o unanicipaed changes in he discoun rae. Jensen & Johnson (995) and Jensen e al. (996) illusrae he wider impac of changes in rae changes. They find ha changes in he discoun rae 7

8 effecively send signals concerning moneary policy. A furher change in he operaion of he Federal Reserve occurred in 994. Prior o February 994 he Federal Reserve would effecively release informaion on rae changes he day afer a FOMC meeing hrough he Open Marke Desk. However, afer his dae rae changes have been publicly announced direcly afer each FOMC meeing. Thorbecke (997) provides empirical evidence concerning he influence of moneary policy on socks. The paper uilizes he Federal Funds Rae and non-borrowed reserves. While he general resuls highligh ha an expansionary moneary policy increases ex-pos reurns, an ineresing elemen of he analysis is ha asymmeries in he responses may also help o explain he findings of Fama & French (995). The auhors find ha moneary shocks affec smaller firms o a greaer exen han large firms. I is hypohesized ha his is due o he impac on credi availabiliy noed by Gerler & Gilchris (994). Given he relaive size of REITs i may herefore be expeced ha his would lead o an enhanced sensiiviy in comparison o he overall marke. However, i should be remembered ha he ax saus of REITs does also bring ino quesion he ax advanages of deb issuance. Kuner (00) assesses he influence and impac of policy based rae changes by he Federal Reserve on marke raes. Marke raes are proxied by Treasury bill, noe and bond yields. The resuls highligh he imporance of decomposing expeced and unexpeced componens of moneary policy changes. While expeced rae changes are no saisically significan, unexpeced rae changes resul in a large and significan response in marke raes. Paelis (997) noe ha moneary policy changes can also provide valuable predicive informaion on fuure sock marke movemens. Furhermore, Rigobon & Sack (003) find ha he relaionship beween ineres raes and sock prices is a bilaeral one, reporing evidence ha sock marke behavior influences fuure ineres rae movemens. A recen paper by Bernanke & Kuner (005) adops boh an even sudy mehodology and a VAR model of he ype proposed by Campbell (99). The even sudy resuls show a significan response o unanicipaed changes in he rae. The VAR analysis finds ha he primary impac of rae changes ono prices is derived from heir impac on expeced fuure excess reurns 7. 8

9 In specific relaion o he empirical ess run in he curren sudy Jones e al. (998) were one of he firs o provide evidence on he calm before he sorm effec. The paper examines he impac of employmen and PPI announcemens on bond reurns. They also examine wha may cause volailiy persisence. They find no evidence of persisence in volailiy following a moneary announcemen, concluding insead ha volailiy persisence may be a resul of he clusering of news announcemens. Using he Michell & Mulherin (994) daabase of news evens hey illusrae ha informaion announcemens are posiively auocorrelaed a significan levels a a daily inerval 8. Bomfim (003) examines he S&P 500 Composie and is response o Fed Funds Rae changes. The auhor iniially finds no evidence of he calm before he sorm effec. While volailiy is higher on he day of he announcemen, here is no reducion in volailiy in he day prior o he FOMC meeing. However, he sample examined in his paper exends back o 989 and herefore pre-daes he change in Federal Reserve policy. As noed by Bomfim (003) beween 989-February 994 only 4% of rae changes were aken a scheduled meeings of he FOMC. However, since he policy change in 994 he vas majoriy of rae changes have coincided wih FOMC meeings. In his sample, running hrough o 998, 85% of all rae changes occurred and were announced on meeing days. Therefore, he imporance of he FOMC meeings and he anicipaion of he markes o hem may have increased since February 994. Once his poenial shif in he imporance of FOMC meeings o he markes in accouned for hrough he use of a dummy indicaing pos 994 rae changes here is significan evidence of a calm before he sorm effec. One furher resul in he paper is ha wih regard o asymmery no significance evidence is repored wih regard o reurns bu here is in relaion o sock marke volailiy. 3: Daa and Mehodological Framework Our mehodology draws on he recen work of Bomfim (003), Jones e al. (998) and Anderson and Bollerslev (998). Firsly, we examine he impac of FOMC announcemens on boh he reurns and volailiy of he REIT secor. Specifically, by spliing he rae change ino is anicipaed and unanicipaed componens he analysis allows an examinaion of he impac of unexpeced rae changes. Secondly, he 9

10 behaviour of REITs reurns around he ime of FOMC meeings is considered and we invesigae he calm before he sorm effec. The daa is his paper is daily and exends from 3 s January 996 hrough o March s 005. A poenial issue wih he use of daily daa is ha i may mask he exac impac. In paricular, i is hard o isolae he impac of Federal Funds Rae changes as oher announcemens may be made ha day. However, as Bomfim (003) noes, FOMC meeings do no sysemaically coincide wih any one economic dae release. The REIT marke is proxied by he Dow Jones-Wilshire Equiy REIT Index. As noed in he inroducion, his paper solely examines he Equiy REIT secor and does no examine, eiher in aggregae or in isolaion, he Morgage REIT secor. The change in he Federal Funds Targe Rae was obained from he Federal Reserve Board of Governors. The proxy used for he unanicipaed change in he arge rae is he -day change in he price of he -monh ahead 30-day Federal Funds Fuures conrac raded on he Chicago Board of Trade (CBOT). Previous papers o have uilized such a proxy for moneary policy changes include: Bomfim & Reinhar (000), Kuner (00), Poole & Rasche (000), Reinhar & Simin (997), Roley & Sellon (998) and Thornon (998). Previous empirical work in he field such as Connolly & Wang (003), Flannary & Proopapadkis (00) and Li & Engle (998) use alernaive measures of expecaions. These alernaives include he growh rae of money supply and survey daa, however, Gurkaynak e al. (00) show ha he fed funds fuures conrac provides he bes available forecas of he Feds Fund Rae. The modeling approach used is based on ha used by Bomfim (003) and also Jones e al. (998). The GARCH model can be specified as follows: REIT = β 0 + β FFF + β REIT + β 3SP + β 4Mon + β 5Tue + β 6Thu + β 7Fri + µ () µ = e s () e = υ h (3) 0

11 E E ( e Ω ) = 0 ( e Ω ) = h ( Ω ) = sh E u (4) h = 0 + αh + α e α (5) The REIT series is he dependen variable in he condiional mean equaion. The independen variables comprise of he -day change in he fed funds fuures (FFF), he lagged one-day REIT reurn and he S&P 500. Dummy variables for days of he week are also incorporaed ino he specificaion. The unexplained componen (µ + ) comprises of a non-normal sochasic elemen (e + ) whose condiional variance is ime-varying and a dummy variable (s + ). The dummy indicaes he impac of paricular day effecs and can be expressed as: s ( F ) ( F ) ( F ) = + δ 0 I + δi + δ I + + δ 3Mon + δ 4Tue + δ 5Thu + δ 6Fri + φ FFF (6) Where I (F) is a dummy se o uniy when here is FOMC meeing and zero oherwise. The model is esimaed using he quasi maximum likelihood procedure proposed by Bollerslev & Wooldridge (99). As previously menioned, hree key hypoheses are esed. The firs hypohesis relaes o a news effec and wheher an unanicipaed change in he fed funds rae has any effec on he REIT secor. This is examined hrough he condiional mean equaion. The hypohesis would be suppored if β is negaive and saisically significan. We also address wheher he shock o moneary policy has any effec on he second momens, which would be highlighed by he saisical significance of φ in Equaion (6). The possibiliy ha here may be an asymmeric volailiy effec (ha higher han expeced changes in raes will lead o grea volailiy) will also be considered. The final hypohesis relaes o he calm before he sorm effec. This refers o a hypohesized lower level of volailiy on he day before FOMC meeings and higher on he day of he announcemen iself. This is esed based he resuls from Equaion (6). The hypohesis is confirmed if coefficien δ 0 is posiive and significan and δ is negaive and significan a convenional levels.

12 4: Empirical Evidence The model is esimaed under a variey of differen scenarios. The iniial examinaion concenraes upon changes in he Fed Fund Fuures on FOMC meeing days. We hen exend his o also incorporae unscheduled rae changes ha ake place ouside of scheduled FOMC meeings 9. The iniial analysis is repored in Table. From hese resuls i can be seen ha he change in Fed Funds Fuures impacs significanly on boh he mean and volailiy of he Equiy REIT secor. Furhermore, he sign of he coefficien in relaion o he mean equaion is of he anicipaed negaive sign. This alone is ineresing given he frequen lack of consisen findings in previous sudies of REIT sensiiviy o ineres rae movemens. The Devaney (00) paper adops he mos similar mehodological approach, in ha a GARCH based model, in his case a GARCH-in-Mean specificaion, is used. However, he analysis on marke raes generally finds an insignifican response in eiher he mean or variance equaions. Only when he Morgage REIT secor is examined are significan coefficiens repored. This divergence in findings highlighs he imporance of aking ino accoun marke expecaions and incorporaing ino he model specificaion he unanicipaed naure of he rae change. In addiion, i should also be reieraed ha he Devaney (00) paper examined monhly no daily daa 0. As would also be expeced, he coefficiens relaing o he lagged REIT secor and he marke index, as proxied by he S&P 500, are posiive and significan a convenional levels. They are also evidence of GARCH effecs in he model, jusifying he use of his form of specificaion. One issue relaing o he day of he week dummies ha deserves noing is ha in boh he mean and variance equaions he coefficiens referring o Friday are posiively signed and significan a convenional levels. This indicaes a Friday effec in boh he firs and second momens of daily REIT index daa. The second hypohesis is concerned wih he exen o which he markes ake ino accoun he unexpeced elemen of he rae change. This is capured hrough he φ coefficien in he variance equaion. A non-zero coefficien would imply ha he markes hadn fully anicipaed he rae change announced a he FOMC meeing. The resuls show a posiive and significan coefficien. This would indicae ha no only had he markes no fully capured in heir expecaions he rae change bu ha he unanicipaed and unaccouned for componen of he change impars new

13 informaion o he marke ha has a subsequen impac upon he volailiy of he REIT secor. The final issue relaes o he hypohesized calm before he sorm. As noed, his is esed hrough he examinaion of coefficiens δ 0 and δ in he variance equaion. Unlike previous empirical evidence such as Bomfim (003) we find no evidence of such an effec. For he hypohesis o be suppored δ 0 should be posiive and significan and δ negaive and significan. The resuls show ha neiher coefficien is significan, and furhermore, δ 0 is of he unanicipaed sign, being negaive. This is an issue ha fuure research may wish o examine in furher deph given ha δ which relaes o he day afer he announcemen is posiive. While lile can be conclusively drawn from hese findings given he lack of significance in any of he relevan coefficiens, i would imply some form of lagged calm before he sorm effec, wih a reduced level of volailiy, increasing pos-announcemen. I is possible ha non-synchronous and hin rading leads o a lagging effec in he Wilshire REIT index hereby conribuing o hese findings. As noed previously, despie he increase in boh he size of he REIT secor and he corresponding increase in rading volume in recen years, he secor is relaively small. While he average marke cap in he secor was jus under $bn as of he end of 005, 46% of he firms had a marke value less han $bn. The use of individual REIT reurns and he separae examinaion of REITs of differing levels of boh marke value and rading volume may produce more conclusive findings in his regard. In comparison o he findings of Bomfim (003) in relaion o he S&P 500, i should be emphasized ha his iniial lack of significan evidence was in relaion o he sample pre-daing he change in Fed policy in 994. Once his was accouned for in he analysis significan resuls were repored. As our sample daes only from 996 he change in policy can no be a possible reason behind he lack of significan evidence. The analysis conained in Table is solely concerned wih rae changes announced a scheduled meeings of he FOMC. In order o consider he sensiiviy of our resuls we invesigae he impac of rae changes on all announcemen days, boh scheduled and unscheduled. While he number of unscheduled announcemens has fallen dramaically in recen years i is sill an imporan issue o consider. This is 3

14 paricularly he case for he evens of 00. During he firs half of 00 here were wo unscheduled rae changes (ineres rae reducions), 3 rd January and 8 h April. These wo paricular unscheduled rae changes are noeworhy given he Fed s preference for scheduled rae changes in recen years and he fac ha hey were boh 50 basis poin reducions. In addiion, he impac of 9/ was also a major facor on he markes ineres rae expecaions and he acions of he Federal Reserve. For his reason, we exend he analysis, as repored in Table, o include rae changes ha occurred ouside of he auspices of a FOMC meeing. There are relaively few changes in he resuls afer he exension of he analysis. As wih he original specificaion, GARCH effecs are eviden, here is he anicipaed influence of boh lagged REIT reurns and he conemporaneous S&P 500 in he mean equaion and evidence of a Friday effec on boh reurns and volailiy. In addiion, as wih he resuls previously discussed here is no significan evidence of a calm before he sorm effec. Finally, here is evidence ha here is a significan response o he unanicipaed componen of he rae change in erms of boh he mean and variance equaion. The final par of he analysis exends he examinaion looking a he impac of he surprise elemen on volailiy o assess wheher here is evidence of an asymmerical response. This analysis is based on he leverage effec noed by Black (976) and he volailiy feedback hypohesis of French e al. (989). This has been suppored empirically in papers such as French e al. (989) and Nelson (99) while asymmery has also been repored in papers closely relaed o he curren sudy such as Bomfim (003) and Connolly & Wang (998). To examine his issue he variance equaion is adjused o form he following specificaion. s = + δ I + φ FFF ( SA) + + δ I ( SA) + + φ FFF + δ Mon + δ Tue + δ Thu + δ Fri (7) Where posiive and negaive unexpeced changes in he fed funds fuures rae are separaed. The resuls, conained in Table 3, are quie conrary o he exising empirical evidence. The exising evidence has largely found evidence of an asymmerical response, wih an enhanced rise in volailiy following a negaive shock, 4

15 i.e. a higher han anicipaed rise in raes, in comparison o posiive shocks. However, in he case of REITs boh coefficiens are of he same sign and differ from each oher o an insignifican degree, wih a p-value from he Wald saisic of 0.3. Two possible reasons behind he lack of asymmery are firsly level of rading in he secor and secondly he more explici link of ineres raes o boh he value of he underlying propery porfolio and he resuling cash flows. 5: Conclusions This paper has exended he analysis of he sensiiviy of REITs o changes in ineres raes in a number of respecs. Firsly, i has, hrough he use of he fed funds fuures, separaed ou rae changes ino heir expeced and unexpeced componens allowing a more in-deph analysis of he efficiency of he markes and also a more accurae examinaion of how he markes respond o rae changes. Secondly, i has examined has specifically esed for boh asymmeric responses in volailiy o ineres rae movemens and he calm before he sorm effec. The analysis provides ineresing resuls. In comparison o previous sudies of REIT ineres rae sensiiviy he main resuls do show significan responses in boh reurns and volailiy o unanicipaed rae changes. The separaion of rae changes ino heir anicipaed and unanicipaed componen is he mos probably reason behind he divergence in hese findings in comparison o hose previously repored. However, he resuls relaing o asymmery and he calm before he sorm are in marked conras o sudies of he broader capial markes. No evidence is found in eiher case. I is possible ha in relaion o he calm before he sorm his is due o he effec of non-synchronous and hin rading wihin he REIT secor, resuling in a lagged effec. There is some, hough insignifican, evidence of a lagged effec, which would be consisen wih non-synchronous rading. I is inended ha fuure drafs of he paper exend on he analysis in a number of respecs. Firsly, i is inended ha a more deailed examinaion of he findings wih regard o he lack of a calm before he sorm effec and asymmery is underaken. As previous noed a possible cause behind boh resuls is he relaive size of he secor. I is herefore inended ha ess be underaken based on porfolios based on marke capializaion. In addiion, i is also inended ha he resuls be exended o examine Morgage REITs. Given heir differen focus and he differences in he underlying 5

16 asses, no only will in all probabiliy will here be divergences in he resuls, bu he link wih he underlying asses of Equiy REITs may aid in he explanaion behind he resuls wih regard o asymmery. 6

17 References Allen, M., Madura, J. & Springer, T. (000). REIT Characerisics and he Sensiiviy of REIT Reurns, Journal of Real Esae Finance and Economics,, 4-5. Andersen, T. & Bollerslev, T. (997). Inraday Periodiciy and Volailiy Persisence in Financial Markes, Journal of Empirical Finance, 4, Bae, S.C. (990). Ineres Rae Changes and Common Sock Reurns of Financial Inermediaries, Journal of Financial Research, 3, Bernanke, B.S. & Kuner, K.N. (005). Wha Explains he Sock Marke s Reacion o Federal Reserve Policy?, Journal of Finance, 60, -57. Black, F. (976). Sudies in Sock Price Volailiy, Proceedings of he Meeings of he American Saisical Associaion, Business and Economics Secion, Bollerslev, T. & Wooldridge, J. (99). Quasi Maximum Likelihood Esimaion and Inference in Dynamic Models wih Time-Varying Variances, Economeric Review,, Bomfim, A. (003). Pre-announcemen Effecs, News Effecs and Volailiy, Journal of Banking & Finance, 7, Bomfim, A. & Reinhar, V. (000). Making News: Financial Marke Effecs of Federal Reserve Disclosure Pracices, Manuscrip, Federal Reserve Board. Campbell, J. (99). A Variance Decomposiion for Sock Reurns, The Economic Journal, 0, Casanias, R. (979). Macroinformaion asnd he Variabiliy of Sock Marke Prices, Journal of Finance, 34, Chen, C.R., Mohan, N. & Seiner, T.L. (999). Discoun Rae Changes, Sock Marke Reurns, Volailiy and Trading Volume: Evidence form Inraday Daa and Implicaions for Marke Efficiency, Journal of Banking & Finance, 3, Chen, S., Hsieh, C. & Jordan, B. (997). Real Esae and he Arbirage Pricing Theory: Macroeconomic Variables vs. Derived Facors, Real Esae Economics, 5, Chen, S., Hsieh, C., Vines, T. & Chiou, S. (998). Macroeconomic Variables, Firm Specific Variables and Reurns o Equiy REITs, Journal of Real Esae Research, 6, Chen, K. & Tzang, D. (988). Ineres-Rae Sensiiviy of Real Esae Invesmen Truss, Journal of Real Esae Research, 3, 3-. Connolly, R. & Wang, F. (003). Economic Equiy Marke Comovemens: Economic News or Conagion, Pacific Basin Finance Journal,, Conover, C.M., Jensen, G.R. & Johnson, R.R. (999). Moneary Environmens and Inernaional Sock Reurns, Journal of Banking & Finance, 3, Cook, T. & Hahn, T. (988). The Informaion Conen of Discoun Rae Announcemens and Their Effec on Marke Ineres Raes, Journal of Money, Credi & Banking, 0,

18 Coer, J. & Sevenson, S. (005). Mulivariae Modelling of Daily REIT Volailiy, Journal of Real Esae Finance & Economics, forhcoming. Dara, A. & Glascock, J. (989). Real Esae Reurns, Money and fiscal Deficis: Is he Real Esae Marke Efficien?, Journal of Real Esae Finance & Economics,, Devaney, M. (00). Time-Varying Risk Premia for Real Esae Invesmen Truss: A GARCH-M Model, Quarerly Review of Economics & Finance, 4, DiPasquale, D. & Wheaon, W. (99). The Markes for Real Esae Asses and Space: A Concepual Framework, Journal of he American Real Esae & Urban Economics Associaion, 0, Dueker, M. (99). The Response of Marke Ineres Raes To Discoun Rae Changes, Federal Reserve Bank of S. Louis Review, 74, Elyasiani, E. & Mansur, I. (998). Sensiiviy of he Bank Sock Reurns Disribuion o Changes in he Level and Volailiy of Ineres Raes: A GARCH-M model, Journal of Banking & Finance, : Fama, E.F. & French, K.R. (995). Size and Book-o-Marke Facors in Earnings and Reurns, Journal of Finance, 50, Fisher, J. (99). Inegraing Research on Markes for Space and Capial, Journal of he American Real Esae & Urban Economics Associaion, 0, Flannery, M.J. & James, C.M. (984). The Effec of Ineres Rae Changes in The Common Sock Reurns of Financial Insiuions, Journal of Finance, 39, Flannery, M.J., Hameed, A.S. and Harjes, R.H. (997). Asse Pricing, Time-Varying Risk Premia and Ineres Rae Risk, Journal of Banking & Finance, : Flannery, M.J. & Proopapadakis, A.A. (00). Macroeconomic Facors Do Influence Aggregae Sock Reurns, Review of Financial Sudies, 5, French, K., Schwer, W. & Samburgh, R. (989). Expeced Sock Reurns and Volailiy, Journal of Financial Economics, 9, 3-9. Gerler, M. & Gilchris, S. (994). Moneary Policy, Business Cycles and he Behavior of Small Manufacuring Firms, Quarerly Journal of Economics, 09, Gurkaynak, R., Sack, B. & Swanson, E. (00). Marke Based Measures of Moneary Policy Expansion, working paper, Board of Governors of he Federal Reserve Sysem. He, L.T., Webb, J.R. & Myer, F.C.N. (003). Ineres Rae Sensiiviies of REIT Reurns, Inernaional Real Esae Review, 6, -. Jensen, G.R. & Johnson, R.R. (995). Discoun Rae Changes and Securiy Reurns in he US, 96-99, Journal of Banking and Finance, 9, Jensen, G.R., Mercer, J.M. & Johnson, R.R. (996). Business Condiions, Moneary Policy and Expeced Securiy Reurns, Journal of Financial Economics, 40, Jones, C.M., Lamon, O. & Lumsdaine, R.L. (998). Macroeconomic News and Bond Marke Volailiy, Journal of Financial Economics, 47,

19 Kane, E.J. & Unal, H. (988). Change in Marke Assessmen of Deposi Insiuion Riskiness, Journal of Financial Services Research,, 0-9. Kuner, K.N. (00). Moneary Policy Surprises and Ineres Raes: Evidence from he Feds Funds Fuures Marke, Journal of Moneary Economics, 47, Kwan, S.H. (99). Reexaminaion of Ineres Rae Sensiiviy of Commercial Bank Sock Reurns using a Random Coefficien Model, Journal of Financial Services Research, 5, Lasrapes, W.D. (998). Inernaional Evidence on Equiy Prices, Ineres Raes and Money, Journal of Inernaional Money and Finance, 7, Li, K. & Engle, R. (998). Macroeconomic Announcemens and he Volailiy of he Treasury Marke, Deparmen of Economics, Universiy of California, San Diego, Working Paper Liang, Y., McInosh, W. & Webb, J. (995). Ineremporal Changes in he Riskiness of REITs, Journal of Real Esae Research, 0, Liang, Y. & Webb, J. (995). Pricing of Ineres Rae Risk for Morgage REITs, Journal of Real Esae Research, 0, Ling, D. & Naranjo, N. (997). Economic Risk Facors and Commercial Real Esae Reurns, Journal of Real Esae Finance & Economics, 4, Lynge, M.J. & Zumwal, J.K. (980). An Empirical Sudy of he Ineres Rae Sensiiviy of Commercial Bank Reurns: A Muli-Index Approach, Journal of Financial and Quaniaive Analysis, 5, McCue, T. & Kling, J. (994). Real Esae Reurn and he Macroeconomy: Some Empirical Evidence from Real Esae Invesmen Trus Daa, 97-99, Journal of Propery Research, 9, Michell, M. & Mulherin, J. (994). The Impac of Public Informaion on he Sock Marke, Journal of Finance, 49, Mueller, G. & Pauley, K. (995). The Effec of Ineres Rae Movemens on Real Esae Invesmen Truss, Journal of Real Esae Research, 0, Nelson, D. (99). Condiional Heeroscedasiciy in Asse Reurns: A New Approach, Economerica, 59, Paelis, A.D. (997). Sock Reurn Predicabiliy and he Role of Moneary Policy, Journal of Finance, 5, Pearce, D.K. & Roley, V.V. (985). Sock Prices and Economic News, Journal of Business, 58, Poole, W. & Rasche, R.H. (000). Perfecing he Marke s Knowledge of Moneary Policy, Journal of Financial Services Research, 8, Reinhar, V. & Simin, T. (997). The Marke Reacion o Federal Reserve Policy Acion from 989 o 99, Journal of Economics and Business, 49,

20 Rigobon, R. & Sack, B. (003). Measuring he Reacion of Moneary Policy o he Sock Marke, Quarerly Journal of Economics, 8, Rigobon, R. & Sack, B. (004). The Impac of Moneary Policy on Asse Prices, Journal of Moneary Economics, 5, Roley, V. & Sellon, G. (998). Marke Reacion o Moneary Policy Non-Announcemens, Federal Reserve Bank of Kansas Ciy, working paper Roley, V. & Troll, R. (984). The Impac of Discoun Rae Changes on Marke Ineres Raes, Federal Reserve Bank of Kansas Ciy Economic Review, January, Smirlock, M. & Yawiz, J. (985). Asse Reurns, Discoun Rae Changes, and Marke Efficiency, Journal of Finance, 40, Sevenson, S., Wilson, P. & Zurbruegg, R. (005). Assessing he Time-Varying Ineres Rae Sensiiviy of Real Esae Securiies, working paper, Real Esae Finance & Invesmen Group, Cass Business School. Sone, B.K. (974). Sysemaic Ineres Rae Risk in a Two-Index Model of Reurns, Journal of Financial and Quaniaive Analysis, 9, Swanson, Z., Theis, J. & Casey, K. (00). REIT Risk Premium Sensiiviy and Ineres Raes, Journal of Real Esae Finance & Economics, 4, Sweeney, R.J. & Warga, A.D. (986). The Pricing of Ineres Rae Risk: Evidence from he Sock Marke, Journal of Finance, 4, Thorbecke, W. (997). On Sock Marke Reurns and Moneary Policy, Journal of Finance, 5, Thornon, D. (998). Does he Fed s New Policy of Immediae Disclosure Affec he Marke, working paper, Federal Reserve Bank of S. Louis. Waud, R. (970). Public Inerpreaion of Federal Reserve Discoun Rae Changes: Evidence on he Announcemen Effec', Economerica, 38, Yourougou, P. (990). Ineres-Rae Risk and he Pricing of Deposiory Financial Inermediary Common Sock, Journal of Banking & Finance, 4,

21 Tables Table : Impac of US Moneary Policy Shocks on he Mean & Volailiy of REIT s (Scheduled Announcemens) REIT= β + β FFF + β REIT + β S & P + β Mon+ β Tue+ β Thu+ β Fri 0 0 s = + δ I h = α + αh ( SA) 0 + α e + δ I ( SA) + δ I ( SA) + + δ Mon+ δ Tue+ δ Thu+ δ Fri + φ FFF Variable Coefficien -saisic Panel A: Mean Equaion β β -0.84* β 0.8* 9.80 β 3 0.4* 8.70 β β * 3. β β 7 0.* 3.37 Panel B: Variance Equaion α 0 0.0* 4.9 α 0.3* 9.06 α 0.80* 4.8 δ δ δ δ δ δ δ 6 0.*.35 φ 0.47*.04 Using one day change in monh ahead federal funds fuure conrac as unanicipaed change. The saisics are robus using he procedure from Bollerslev & Wooldridge (99). * indicaes saisical significance

22 Table : Impac of US Moneary Policy Shocks on he Mean & Volailiy of REIT s (Toal Announcemens) REIT = β + β FFF + β REIT h = α + α h 0 0 s = + δ I ( TA) 0 + α e + δ I ( TA) + δ I ( TA) + + β S & P + β Mon+ β Tue+ β Thu+ β Fri+ β 00 + δ Mon+ δ Tue+ δ Thu+ δ Fri + δ 00+ φ FFF Variable Coefficien -saisic Panel A: Mean Equaion β β -0.7* -5.0 β 0.8* 9.89 β 3 0.4* 8.76 β β * 3.0 β β 7 0.* 3.35 β Panel B: Variance Equaion α 0 0.0* 4.78 α 0.3* 9.05 α 0.80* 4.70 δ δ δ δ δ δ δ 6 0.3*.36 δ φ 0.57*.0 Using one day change in monh ahead federal funds fuure conrac as unanicipaed change. The saisics are robus using he procedure from Bollerslev & Wooldridge (99). * indicaes saisical significance

23 Table 3: Impac of US Moneary Policy Shocks on he Mean & Volailiy of REIT s (Scheduled Announcemens) REIT = β + β FFF h = α + α h s = + δ I 0 0 ( SA) + α e + δ I ( SA) + + β REIT + β S & P + β Mon + β Tue + β Thu + β Fri + δ Mon + δ Tue + δ Thu + δ Fri + φ FFF φ FFF Variable Coefficien -saisic Panel A: Mean Equaion β β -0.84* β 0.8* 9.80 β 3 0.4* 8.6 β β * 3.5 β β 7 0.* 3.37 Panel B: Variance Equaion α 0 0.0* 4.73 α 0.3* 9.06 α 0.8* 5.4 δ δ δ δ δ δ 6 0.*.9 φ φ Hypohesis Tes (p-values for Wald Saisic) φ =φ =0 0.3 Using one day change in monh ahead federal funds fuure conrac as unanicipaed change. The saisics are robus using he procedure from Bollerslev & Wooldridge (99). * indicaes saisical significance. 3

24 Endnoes: In addiion o wha are commonly referred o as Equiy REITs here are also Morgage REITs. These vehicles inves in real esae based deb raher han in he underlying propery marke. The 75% of asse and 90% of axable income rules also apply o Morgage REITs. In he curren paper only Equiy REITs are examined. I is inended ha fuure drafs of he paper exend he analysis o he morgage secor. See Allen e al. (000), Chen e al. (997), Chen & Tzang (988), Devaney (00), Liang & Webb (995), Ling & Naranjo (997), McCue & Kling (994), Mueller & Pauley (995) and Swanson e al. (00). 3 See Sone (974), Lynge & Zumwal (980), Sweeney & Warga (986), Sco & Peerson (986) and Bae (990). 4 Conover e al. (999) also noe he imporance and influence of US moneary policy in an inernaional conex, while Lasrapes (998) provides furher inernaional empirical evidence on he influence of moneary policy on equiy markes. 5 An early paper o examine his is Waud (970). 6 Roley & Troll (984), Cook & Haen (988) and Duecker (99) examine he issue of echnical and non-echnical rae changes in he conex of he impac of policy rae changes on marke ineres raes. 7 Furher papers o have examined issues concerned wih macroeconomic daa and sock movemens include Berry & Howe (994), Michell & Mulherin (994), Ederingon & Lee (993), Culer e al., (989) and Roll (988). 8 Casanias (979) provides an early sudy on he volailiy of he markes surrounding he release of economic daa. 9 Noe ha given he daa period examined ( ), i is no necessary o ake ino accoun he change in he operaions of he Federal Reserve in The imporance of he frequency is also highligh in a recen working paper by Sevenson e al. (005) who examine propery companies in he UK in a similar GARCH-M framework. They do find evidence of significan ineres rae sensiiviy in he UK marke a a daily frequency. However, differences in he srucure of real esae vehicles beween he UK and US do make a direc comparison of findings difficul. Given he evens of he firs nine monhs of 00, he unusually large changes in moneary policy and he erroris aacks, we also incorporae a dummy variable ino boh he mean and variance equaions. As can be seen from Table, he dummy variable is no saisically significan. 4