Monetary Policy & Real Estate Investment Trusts *

Transcription

1 Moneary Policy & Real Esae Invesmen Truss * Don Bredin, Universiy College Dublin, Gerard O Reilly, Cenral Bank and Financial Services Auhoriy of Ireland & Simon Sevenson, Cass Business School, Ciy Universiy * The auhors would like o hank paricipans a he 2006 American Real Esae Sociey conference and he 2007 American Real Esae & Urban Economics Associaion annual conference, especially our discussan David Downs, for commens on earlier drafs of his paper. School of Business, Universiy College Dublin, Blackrock, Couny Dublin, Ireland. don.bredin@ucd.ie Economic Analysis and Research Deparmen, Cenral Bank and Financial Services Auhoriy of Ireland, PO Box 559, Dame Sree, Dublin 2, Ireland. gerard.oreilly@cenralbank.ie Faculy of Finance, Cass Business School, Ciy Universiy, 06 Bunhill Row, London, ECY 8TZ, UK. Tel: , Fax: , s.sevenson- 2@ciy.ac.uk

2 Moneary Policy & Real Esae Invesmen Truss Absrac This paper assesses he response of Real Esae Invesmen Truss (REIT's) o unexpeced changes in US moneary policy. A criical elemen in his sudy is he use of fuures markes o isolae unexpeced changes in he policy rae. We find a significan negaive response of REIT reurns o a surprise change in he policy rae. The paper hen examines he poenial sources behind such an observed response. We find imporan differences beween he REIT marke and he broader equiy marke. Inuiively he impac of moneary policy on dividend news appears o be more pronounced in he REIT case. However, he decomposiion of he response o moneary shocks is largely driven by revision in expecaions regarding fuure excess reurns and hese resuls are largely consisen wih he findings for he overall sock marke as repored in Bernanke & Kuner (2005). 2

3 : Inroducion Real Esae Invesmen Truss (REIT s) are he primary raded real esae vehicle in he US and are srucured in a similar fashion o muual funds in order o enhance heir ax ransparency in comparison o convenional corporae srucure. Dividend paymens of he rus are ax exemp provided wo condiions are saisfied wih respec o he underlying asses and dividend paymens of he rus. The wo requiremens are ha a minimum of 75% of a REIT s asses mus be invesed in real esae and a minimum of 90% of axable income mus be passed hrough o shareholders. The las decade in he US has winessed dramaic growh in REIT s, wih reurns of 300% since he end of 999. However during his ime, REIT s have begun o behave more akin o general equiy markes, e.g. REITs have now been incorporaed ino broad marke indexes (S&P 500) and large index funds now buy and sell hem wih he res of he marke. Concomianly moneary policy has become he main insrumen in he sabilisaion of inflaion and oupu wih commenaors and analyss paying close aenion o changes in moneary policy in he belief ha such changes, paricularly unexpeced changes, can influence sock marke values immediaely. I is hen naural o ask wheher he characerisics of REIT s, due o heir srucure and he naure of he underlying real esae marke, gives rise o a differen response wih respec o unanicipaed moneary policy as compared o he broader equiy sock marke. In paricular is he source of any response o surprise changes in moneary policy he same or differen beween REIT s and he sock marke in general? If he srucural aspec of REIT s are he key, hen we may well expec o find a more enhanced role of dividends in response o any surprises. However, if in fac he naure of he underlying asse is he deermining facor hen we may expec o find a larger impac o he surprise in erms of curren excess reurns and evidence of persisence in fuure excess reurns. The laer may indicae he sensiiviy of he real esae marke o news abou Cenral Bank behaviour. Bernanke & Kuner (2005) argue ha he impac of policy rae changes on he general equiy marke occur hrough hree main channels, namely; he impac on he expeced fuure dividends, changes in he real ineres rae used o discoun hese 3

4 dividends and changes in he equiy risk premium. Is i likely ha hese facors will affec REIT s in a similar fashion o ha observed in he broader sock marke and are wha are he addiional issues ha require consideraion in a REIT conex. In paricular, he consrains placed on he REIT secor wih respec o asses and dividends ie he performance of he russ very closely o ha of he underlying propery porfolio. A key issue here is ha he underlying privae real esae marke has a number of fundamenal and well-documened linkages o ineres rae movemens. Ineres rae changes may influence general economic aciviy, which iself will feed hrough o occupaional demand in he underlying real esae marke and his should lead o changes in obainable renal values and herefore income and subsequenly REIT dividends. Moreover, changes in ineres raes will also affec upon real esae yields herefore leading o an addiional impac on propery values. The exising lieraure on he relaionship beween REIT s and ineres raes has largely concenraed on he impac of changes in acual marke ineres raes (e.g. Liang e al., 995, Mueller & Pauley, 995, Devaney, 200 and He e al., 2003). However, hese sudies fail o disinguish beween (un)anicipaed movemens in ineres raes. If markes are efficien he iming of he response in reurns will be dependen on he expecaion of rae movemens, wih REIT prices only responding o unanicipaed movemens. This paper exends recen work by Bredin e al. (2008) who examine he impac of moneary shocks on he firs and second momens of REIT reurns in a GARCH framework. Similar o his sudy, he auhors use he fed funds fuure rae o proxy marke expecaions concerning changes in he Fed Funds Rae. Their resuls show a srong response in boh he firs and second momens of REIT reurns o unexpeced policy rae changes. Previous work addressing ineres rae changes only, such as Devaney (200), found no significan impac on REIT s reurns and so highlighs he imporance of capuring marke expecaions. In a broader conex a large number of papers have examined he influence of moneary policy on sock reurns wih Pearce & Roley (985) being one of he firs sudies o examine he impac of unanicipaed rae changes. Marke expecaions are obained hrough survey daa and heir resuls show ha socks reac significanly o unanicipaed ineres rae changes pos 979. Thorbecke (997) finds ha an expansionary moneary policy increases ex-pos reurns and ha moneary shocks 4

5 affec smaller firms o a greaer exen while Paelis (997) noes ha moneary policy changes can provide predicive informaion on sock price movemens. Finally, Bernanke & Kuner (2005) highligh he imporance of US moneary policy shocks on US sock reurns using a fuures markes based proxy for he surprise. They find ha unanicipaed moneary policy has a significan negaive effec on aggregae sock reurns and his is primarily driven by he ineres rae impac on news regarding fuure expeced reurns. In his paper we seek o answer wo key quesions. Firsly, we examine he impac of unanicipaed ineres rae changes on REIT reurns wihin an even sudy mehodology. The second par of he paper builds on his analysis o assess he likely reasons behind he observed response of he REIT secor o moneary policy surprises. In line wih Bernanke & Kuner (2005) we use a variance decomposiion in he spiri of Campbell (99) and Campbell & Ammer (993) o ideniy he channels behind he response of REIT reurns o moneary policy surprises. This approach decomposes unanicipaed changes in excess reurns ino he following componens; revisions in expecaions regarding fuure dividends, real raes and fuure excess reurns and hen assesses how each of hese componens are affeced by an unanicipaed ineres rae change. The second par of he sudy will indicae he source of any response o surprise changes in moneary policy and wheher his response is consisen wih general equiy markes. The imporance of he srucural aspec of REIT s and he naure of he underlying asse will be eviden from he variance decomposiion approach. The remainder of he paper is srucured as follows. Secion 2 discusses he daa used in he analysis, wih he main empirical findings repored in Secion 3. The final secion provides concluding commens. 2: Impac of Moneary Policy Shocks The even sudy is based around he following baseline regression. () e u R = α + α r + α r + µ 0 2 5

6 where R is he -day REIT reurn and is defined as he log -day change in he REIT from o - while of he policy rae decision and r u is he unexpeced change in he policy rae on he day r e is he expeced change. The laer is simply measured as he difference beween he acual policy rae change beween and -, r, and he unexpeced change, r u. An imporan elemen in he above specificaion is he need o derive a proxy for he unanicipaed componen of he policy rae change. In he US, he policy rae arge is he federal funds rae (an inerbank marke rae rading excess reserves beween commercial banks) wih he arge rae se afer each FOMC meeing. Wih he adven of federal funds fuure conracs in he lae 980s researchers have focused on he informaion conained in he federal funds fuures rae o idenify expecaions of changes in fuure policy. The selemen price of he conrac is 00 minus he average of he daily overnigh federal funds rae during he monh of he conrac. Hence, a forecas of he federal funds rae is implied by he price of he conrac. A a daily horizon, we use he one-day change in he federal funds fuures rae beween and - o capure unexpeced changes in he federal funds rae (policy rae). This approach is consisen wih work of boh Kuner (200) and Bernanke and Kuner (2005). 2.: Daa and Empirical Resuls Our sample frequency is daily and runs from January 996 hrough o March The Equiy REIT secor is proxied by he Dow Jones-Wilshire Equiy REIT Index, while he S&P500 is included as a conrol variable. 2 The daa is sourced from Daasream, US Federal Reserve and SNL Financial Our even sudy focuses on Federal Open Marke Commiee (FOMC) meeing daes and days when he policy rae was changed ouside meeing daes. The unanicipaed change in he arge rae is proxied by he -day change in he price of he -monh ahead 30-day Federal Funds Fuures conrac raded on he Chicago Board of Trade (CBOT). The fed funds fuures conrac has been used as a proxy for marke expecaions regarding rae changes in a number of sudies (e.g. Bomfim & Reinhar, 2000, Kuner, 200, Poole & Rasche, 2000, Reinhar & Simin, 997, Roley & Sellon, 998 and Thornon, 998) while 6

7 Gurkaynak e al. (2002) found ha he fed funds fuures conrac provides he bes available forecas of he Feds Fund Rae. Our analysis conains a oal of 7 meeing daes of he FOMC. During his period a oal of 29 changes in he Federal Funds Targe Rae occurred, all bu four of which coincided wih scheduled meeings of he FOMC. The four changes ha occurred ouside scheduled meeings were he rae change associaed wih he collapse of Long Term Capial Managemen (Ocober 5 h 998) and hree changes in 200. The Ocober 998 rae change was a 25 basis poins cu. The 200 rae changes, all of which saw he rae change by 50 basis poins, were on January 3 rd, April 8 h and Sepember 7 h. The iniial resuls, repored in Table, examine boh changes announced afer scheduled meeings of he FOMC and he four unscheduled rae changes. Four alernaive specificaions are examined. The firs, shown in column, repors a significan negaive coefficien wih respec o unexpeced rae changes. In addiion, he response o he expeced componen in rae changes is no significan a convenional levels and hus consisen wih he efficien markes hypohesis. The magniude of he response o unexpeced changes is relaively smaller han ha found for he overall sock marke index in Bernanke & Kuner (2005) who repor a coefficien of However, i is imporan o noe ha he sample periods are differen, wih Bernanke & Kuner (2005) examining a oal of 55 rae changes over he period 989 hrough Over heir sample period here was an imporan change in FOMC operaing procedure. Prior o February 994, when he FOMC made a policy rae decision i didn communicae is decision explicily o he marke. Marke paricipans had o infer such decisions by observing he acions of he Open Marke Desk. Since February 994, he FOMC noifies he markes of is decision afer each FOMC meeing. 3 Hence, his change in operaing procedure during he Bernanke and Kuner (2005) sample period could explain he difference in resuls. Nex we seek o assess he robusness of our resuls. I could be ha our resuls are driven by he fac ha REIT s reurns simply respond o changes in general sock 7

8 marke on he day of a moneary policy announcemen bu no o moneary policy change iself. Hence he second specificaion, repored in column 2 of Table, incorporaes he overall marke, as proxied by he S&P 500 Composie Index. Once he behaviour of he general marke is conrolled for, he significance of he moneary surprise disappears. I is however possible ha he resuls for specificaions (i) and (ii) are driven by ouliers in he sample and he accompanying response on hose days of he general marke. We herefore re-esimae he firs wo specificaions excluding he moneary policy change announced on Sepember 7 h 200, which was he firs day of rading on US exchanges following he aacks of Sepember h. While his rae change was in direc response o he erroris aacks i is effecively impossible o isolae he impac of he rae change on he markes. Specificaion 3 in Table, excludes his dae and he coefficien associaed wih he unexpeced ineres rae change becomes more significan while specificaion 4 which includes same day S&P reurns we find he surprise ineres rae change is now negaive and saisically significan. 4 The coefficien relaing o he unexpeced componen of he rae change is 2.79, is saisically significan and is very similar o he iniial coefficien of 2.20 and ha repored for he general sock marke repored in Bernanke & Kuner (2005). The resuls repored here would sugges ha he paricular srucure associaed wih REIT s does no unduly influence he behaviour of REIT reurns as a resul of a surprise change in moneary policy. 3: Variance Decomposiion of REIT s Reurns The second par of his paper builds on he preceding analysis and endeavours o idenify he sources underlying he response in REIT reurns wih respec o an unanicipaed policy rae change. The approach adoped here draws on he work of Campbell (99) and Bernanke & Kuner (2005). Campbell (99) decomposes unanicipaed changes in excess reurns ino revisions in expecaions concerning; fuure dividends, curren and fuure real raes and fuure excess reurns. Bernanke & Kuner (2005) exends his analysis by examining he response of each of hese facors o unanicipaed policy rae changes. 8

9 If we define he one-period excess reurn as he oal one-period reurn minus he riskfree rae, he unanicipaed componen of he excess reurn is simply he difference beween he expeced excess reurn and he acual reurn. Therefore, he unexpeced excess reurn (e y ) can be defined as equal o revision in expecaions concerning fuure dividends (e d ), minus news concerning fuure real ineres raes (e r ) and fuure excess reurns (e y ) i.e,: = ~ ~ ~ (2) y d r y e e + e e Each of hese componens are defined respecively as: ( ) E E j= e~ ρ (3) d j = d j+ 0 ( ) E E j= ~ j e ρ r (4) r = ( ) E E j= y = 0 j+ ~ j e ρ y (5) j+ In hese definiions ρ refers o he discoun facor. We use a forecasing VAR o model expecaions of he variables in equaions (3) o (5) and his can be represened as: z Az ω (6) = + where z consiss of he following variables: excess reurns, he real ineres rae and any addiional variables appropriae for use in he conex of forecasing hese wo variables of ineres. Based on esimaes from he VAR i is possible o exrac he discouned sum of revisions in expecaions for each of he erms in equaion (2) as follows: e s ω (7) y = y 9

10 ~ s y ρaϖ y e = (8) ( ρa) r sr e~ ϖ + = (9) ~ ( ρa) = ~ ~ (0) d y y r e e + e + e where s y and s r are appropriae selecion marices. Campbell and Ammer (993) illusraes how he variance of news concerning curren excess reurns can be decomposed by aking he variance of boh sides of equaion (2). var y d r y ( e ) ( e~ ) ( ~ e ) ( e~ + = var + + var + + var ) d r d y r y ( e~, e ~ ) 2cov( e~, e ~ ) + 2cov( e~, e~ ) 2cov () Bernanke & Kuner (2005) adap he framework of Campbell (99) o specifically examine he impac of moneary policy surprises on revisions in expeced excess reurns. The VAR is exended o incorporae unanicipaed policy rae changes as follows: u + = Az + φ + z i ω (2) The impac of he surprise elemen of moneary policy is incorporaed hrough he variable u i +, and he coefficien marix φ capures he conemporaneous response of elemens in z. The disurbance erm is orhogonal o he moneary shock. Consisen esimaes of A and φ are obained hrough iniially esimaing he VAR as specified in equaion (6) and hen regressing he one-sep ahead forecass on he moneary surprise. Bernanke & Kuner (2005) show ha hrough he examinaion of he effec of a moneary shock on each of he discouned sums of expeced fuure excess reurns, dividends and real ineres raes, i is possible o elucidae he source of he response of sock reurns o he moneary policy surprise. Based on equaions (8) o (0) he impac of he moneary surprise wih regard o news regarding curren excess reurns and each of is componens are derived below. For example, he impac of he policy surprise in relaion o excess reurns leads o equaion (8) being re-defined as: 0

11 u ( φ i + ϖ ) ~ s y ρa y e = (3) ( ρa) Therefore, he response of he presen value of news regarding fuure excess reurns can be defined as: s y ρa ρφ ( A) (4) The response in real reurns and dividends can herefore be similarly defined as in Equaions (5) and (6) respecively. s r φ ρa ( ) ( s + s ) r y φ ( ρa) (5) (6) A problem in he esimaion of he VAR concerns he need for an adequae sample size. Furhermore, facors such as he change in fed policy in 994 and he fac ha he fed funds fuures conrac only daes back o 989 furher limis our abiliy o esimae equaion (2) wih he moneary shock direcly incorporaed ino he VAR. We herefore follow he approach of Bernanke & Kuner (2005). Using monhly daa he iniial VAR in equaion (6) is esimaed over he sample period January 974 o December 2004 and he resuls from his serve as he basis for he variance decomposiion analysis. We nex examine how moneary policy informaion impacs upon excess reurns using he pos 996 daa by regressing he -sep ahead forecas errors of he VAR on he unanicipaed change in moneary policy. This is possible as can be viewed as being a predicion error from a raional forecas made a ime. u i + As Bernanke & Kuner (2005) noe i should also be orhogonal o z. 3.: Daa and Variance Decomposiion Resuls

12 Given ha he forecasing VAR requires periodic ime series daa, his secion uses monhly daa, again colleced from Daasream. The forecasing VAR in our sudy is run wihou he moneary shock. This allows us o have a longer sample for he forecasing VAR, , and a resriced (and consisen wih ha used in he previous secion) sample over which we measure our moneary shock The longer sample period for he forecasing VAR should give greaer precision o our esimaes and such an approach has been adoped boh by Bernanke and Kuner (2005) and Faus, Swanson and Wrigh (2004). The variables included in he VAR are he REIT excess reurn, he real ineres rae ( monh Treasury Bill yield minus he CPI), he log dividend price raio, he monh change in he shor rae (reasury bill), he spread beween he 0 year and he monh Treasury yield and finally he relaive bill rae (3 monh bill rae minus is 2 monh lagged moving average). 6 Besides he excess reurn and he real ineres rae, which are required for he decomposiion, we also include variables ha have been found o be successful a sock reurn predicabiliy (see Campbell & Ammer, 993). The marke excess reurn is measured using he change in he log oal marke reurn index, incorporaing prices and dividends, in excess of he shor-erm ineres rae. The real ineres rae is calculaed using he shor-erm ineres rae minus he CPI inflaion rae. 7 Our definiion of he moneary policy shock using monhly daa is he following; 8 i u = D D d = i, d f, D (7) where i,d is he funds rae arge on day d of monh and f -,D is he rae corresponding o he monh fuures conrac on he las day of monh -. The variance decomposiion resuls are repored in Table 2 along wih a full se of diagnosic es resuls. The diagnosic es resuls indicae ha here is no evidence of incorrec funcional form, serial correlaion or heeroscedasiciy in he errors of he forecasing VAR. However, here is evidence of non-normaliy in he residuals and as a resul we boosrap our sandard errors. 9 The resuls from he variance decomposiion for news regarding curren excess reurns for REIT s are broadly consisen wih boh Campbell and Ammer (993) and 2

13 Bernanke & Kuner (2005) for he aggregae sock excess reurns. Overall he level of forecasabiliy of REIT reurns, 6.%, are comparable o hose repored for marke reurns repored in Campbell and Ammer (993), bu considerably higher han hose repored in Bernanke & Kuner (2005). However, i is eviden ha he imporance of dividends in a REIT conex is enhanced in comparison o he analysis of he aggregae sock marke index conained in Bernanke & Kuner (2005). Whereas ha paper repored ha dividends conribued 24.5% he comparable finding wih regard o REIT s is 33.0%. Given he minimum dividend payou requiremen wih REIT s and he resuling relaively high dividend yield his is no an unexpeced resul. Furhermore, i can be observed ha he resuls wih regard o he covariance erms are of enhanced imporance in his case. In erms of levels of significance, we find ha news abou dividends is no precisely esimaed. One reason for he lack of saisical significance in our work relaive o oher papers in he lieraure is ha we calculae -saisics based on boosrapped sandard errors while oher auhors use he dela mehod. Boosrapped saisics are likely o be more accurae as he dela mehod is well known o undersae rue sandard errors. 0 We also find ha news regarding he real rae accouns for almos 0% in he variance decomposiion and is highly saisically significan. This resul is again consisen wih he previous evidence using general marke reurns. Boh he signs and he coefficien weighs on he covariance erms are boh inuiive and broadly consisen wih recen sudies, e.g., he negaive relaionship beween news regarding fuure real raes and excess reurns. The resuls relaing he source of he response of REIT s o moneary policy surprises are repored in Table 3. We find ha he decline in curren excess reurns due o an unanicipaed change in ineres raes is driven by a revision in expecaions regarding fuure excess reurns. Furhermore, a moneary policy surprise does no have a significan effec on news regarding fuure dividends or he real rae. I is perhaps surprising ha given he imporance of dividends in a REIT conex ha an enhanced, or indeed significan, response is no noed. 2 In addiion, he resuls repored here are broadly in line wih hose repored by Bernanke & Kuner (2005) for he aggregae sock marke. The poin esimae of he impac of a shock o news regarding curren 3

14 REIT excess reurns (alhough only significan a 0%) is very similar o he impac for he general sock marke. There is evidence o sugges he impac on news regarding fuure REIT excess reurns is larger, wih a larger and highly saisically significan poin coefficien compared o he general sock marke. 3 The resuls indicae ha he dividend resricion on REIT s, does no influence he effec of moneary policy surprises on reurns. However, he underlying asse, real esae, does have a significan implicaion, wih a persisen fuure excess reurns response o surprises. Implicaions for he general real esae marke. 4: Conclusion This paper has examined boh he response and he source of response of REIT reurns o unanicipaed changes in moneary policy. The even sudy resuls indicae ha REIT s do reac in a manner consisen wih marke efficiency, wih a negaive saisically significan response in reurns o an ineres rae surprise. Consisency wih he efficien markes is furher suppored by he finding ha he expeced componen is no saisically significan. The subsequen variance decomposiion analysis aims o examine he poenial causes behind he response in he REIT secor. The baseline VAR model for he REIT marke is broadly similar o resuls repored for he general equiy marke, wih he excepion of he heighened role played by news abou fuure dividends. When addressing he impac of moneary policy shocks we find ha he response is largely consisen wih he findings for he sock marke, as repored in Bernanke & Kuner (2005), and does no appear o be overly affeced by characerisics associaed wih he REIT marke. The curren REIT excess reurn reacs in a similar fashion o he surprise, alhough our resuls do sugges ha he impac on fuure REIT excess reurns is considerably larger. Overall he resuls do sugges ha a moneary policy surprise does lead o behaviour in he REIT s secor ha is consisen wih efficien markes and wih he general sock marke. The insiuional naure of REIT s and of he general real esae marke does no appear o adversely influence reacions o moneary policy surprises. 4

15 References Bernanke, B.S. & Kuner, K.N. (2005). Wha Explains he Sock Marke s Reacion o Federal Reserve Policy?, Journal of Finance, 60, Bomfim, A. (2003). Pre-announcemen Effecs, News Effecs and Volailiy, Journal of Banking & Finance, 27, Bomfim, A. & Reinhar, V. (2000). Making News: Financial Marke Effecs of Federal Reserve Disclosure Pracices, Manuscrip, Federal Reserve Board. Bredin, D., O Reilly, G. & Sevenson, S. (2008). Moneary Shocks and REIT Reurns, Journal of Real Esae Finance & Economics, forhcoming. Campbell, J. (99). A Variance Decomposiion for Sock Reurns, The Economic Journal, 0, Campbell, J. & Ammer, J. (993). Wha Moves he Sock and Bond Markes? A Variance Decomposiion for Long-Term Asse Reurns, Journal of Finance, 48, Devaney, M. (200). Time-Varying Risk Premia for Real Esae Invesmen Truss: A GARCH-M Model, Quarerly Review of Economics & Finance, 4, Faus, J., Swanson, E. & Wrigh, J. (2004) Idenifying VARs Based on High Frequency Fuures Daa, Journal of Moneary Economics, 5, Flannery, M.J. & Proopapadakis, A.A. (2002). Macroeconomic Facors Do Influence Aggregae Sock Reurns, Review of Financial Sudies, 5, Gurkaynak, R., Sack, B. & Swanson, E. (2002). 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. (2003). Ineres Rae Sensiiviies of REIT Reurns, Inernaional Real Esae Review, 6, -2. Kuner, K.N. (200). Moneary Policy Surprises and Ineres Raes: Evidence from he Feds Funds Fuures Marke, Journal of Moneary Economics, 47, Liang, Y. & Webb, J. (995). Pricing of Ineres Rae Risk for Morgage REIT s, Journal of Real Esae Research, 0, Mueller, G. & Pauley, K. (995). The Effec of Ineres Rae Movemens on Real Esae Invesmen Truss, Journal of Real Esae Research, 0, Paelis, A.D. (997). Sock Reurn Predicabiliy and he Role of Moneary Policy, Journal of Finance, 52, Pearce, D.K. & Roley, V.V. (985). Sock Prices and Economic News, Journal of Business, 58, Poole, W. & Rasche, R.H. (2000). Perfecing he Marke s Knowledge of Moneary Policy, Journal of Financial Services Research, 8,

16 Reinhar, V. & Simin, T. (997). The Marke Reacion o Federal Reserve Policy Acion from 989 o 992, Journal of Economics and Business, 49, Rigobon, R. & Sack, B. (2003). Measuring he Reacion of Moneary Policy o he Sock Marke, Quarerly Journal of Economics, 8, Rigobon, R. & Sack, B. (2004). 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 Thorbecke, W. (997). On Sock Marke Reurns and Moneary Policy, Journal of Finance, 52, Thornon, D. (998). Does he Fed s New Policy of Immediae Disclosure Affec he Marke, working paper, Federal Reserve Bank of S. Louis. 6

17 Tables Table : Influence of Moneary Policy Changes on REIT Reurns i ii iii iv Consan (.509) (0.422) (2.900) (2.348) Expeced (.382) (-0.703) (0.829) (0.34) Unexpeced (-.933) (.28) (-4.007) (-2.053) S&P (3.06) (0.903) R Sandard Error Durbin-Wason Noe: The hird and fourh specificaions exclude Sepember h 200. Values in parenheses below coefficien values are robus -saisics. 7

18 Table 2: Variance Decomposiion of REIT Reurns Toal % Share Var (e y ) Var (e d ) (0.6) Var (e r ) (6.70) Var (e y ) (0.4) -2Cov (e d, e r ) (0.45) -2Cov (e d, e y ) (-0.62) 2Cov (e y, e r ) (-0.62) Diagnosic Tes Resuls and adjused R 2 from REIT Excess reurn equaion Adjused R 2 from REIT Excess Reurn 0.06 Equaion LM es for serial correlaion Ramsey Rese es for funcional form 0.88 Normaliy es of he residuals Heeroscedasiciy es Noe: The able repors resuls from he variance decomposiion of revision in expecaions abou curren excess reurn, e y, Dividends, e d, real ineres raes, e r, and fuure excess reurns, e y. The numbers in parenhesis conain - saisics which use he boosrap simulaion (0,000 runs). The repored resuls are for he sample January 974 o December All Diagnosic resuls refer o P values 8

19 Table 3: Impac of Moneary Policy on News Regarding Curren REIT excess reurns, fuure dividends, fuure real ineres raes and fuure REIT excess reurns e y e d e r e y Consan (-.85) (-0.7) (0.3) (2.55) Noe: The numbers in parenheses conain boosrap esimaed -saisics (0,000 runs). 9

20 Endnoes: A relaed lieraure has examined he response in volailiy o moneary shocks. Bomfim (2003) examines he S&P 500 Composie and is response o Fed Funds Rae changes. The auhor finds evidence of a calm before he sorm effec wih volailiy reduced he day prior o a fed funds rae change and higher on he day of he announcemen. Bredin e al. (2008) in heir examinaion of REIT s however no only find no evidence of his effec in he REIT secor bu also highligh he sensiiviy of such effecs in relaion o he sample wih no evidence also repored wih respec o S&P Noe ha due o heir quie differen characerisics he Morgage REIT secor is no examined. 3 Due o REIT s daa availabiliy our sample begins in January 996 and so we have a consisen sample in relaion o Fed announcemen policy. 4 This resul is in marked conras o when he marke proxy was iniially included. 5 The raionale for using a shorer sample in measuring he moneary shock is o avoid issues such as analysing moneary policy over fundamenally differen moneary policy regimes and differen announcemen procedures. 6 The marke (S&P500) excess reurn is also included in he VAR. Omiing his variable does no appear o make any qualiaive difference o he resuls. 7 We esimae a one lag VAR. The opimal lag lengh of he VAR was seleced using he sandard informaion crieria, Akaike informaion (AIC) and Schwarz Bayesian (SBC). 8 For he even sudy mehodology, daily daa is adoped, hence he definiion of he moneary policy shock is he one day change in he 3 monh serling fuures conrac. However, given he VAR mehodology adops monhly daa, i is unlikely ha a similar definiion will give an appropriae measure of he shock. The measure adoped for he monhly frequency shock is consisen wih ha used by Bernanke and Kuner (2005). 9 We elec o obain sandard errors using a boosrap procedure raher han a Mone Carlo simulaion. The boosrap allows us o draw from he empirical sample error disribuion, which displays non-normaliy, raher han having o assume a given error disribuion as wih he Mone Carlo. 20

21 0 I should also be noed ha Bernanke and Kuner (2005) also found mixed evidence in relaion o levels of significance, when using he dela mehod. However, Campbell and Ammer (993) do find using US daa ha he sign on he covariance erms is sensiive o he paricular sample chosen. 2 However, as wih he variance decomposiion resuls, he use of boosrap esimaes for he -saisics may explain he lack of significance. 3 Bernanke and Kuner (2005) do find a similar sized coefficien on he news abou fuure excess reurns for heir forecasing VAR, alhough no saisically significan. 2