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Economic Policy Uncertainty and Real Estate Market: Evidence from U.S. REITs

Author

Listed:
  • Ying Zhang

    (Fairfield University)

  • J. Andrew Hansz

    (The University of Texas at Arlington)

  • Wikrom Prombutr

    (California State University)

Abstract

We examine how economic policy uncertainty (EPU) affects the monthly performance of U.S. real estate investment trusts (REITs) from 1985 to 2018. First, a positive shock in EPU impairs contemporaneous REIT returns but predicts higher positive future returns. Such a return reversion has not been previously documented, and we provide some explanations. Second, although EPU can explain for the current returns of both equity and mortgage REITs, EPU is unable to predict the future returns of mortgage REITs. Third, breaking down the main EPU index into its four components, we find that the impact of EPU is primarily from the broad newspaper coverage of policy-related economic uncertainties while the other components are less influential. Our results indicate that policy uncertainty can affect the value of real estate assets, and EPU is an economically important factor for understanding and pricing REITs.

Suggested Citation

  • Ying Zhang & J. Andrew Hansz & Wikrom Prombutr, 2022. "Economic Policy Uncertainty and Real Estate Market: Evidence from U.S. REITs," International Real Estate Review, Global Social Science Institute, vol. 25(1), pages 55-87.
    • Handle: RePEc:ire:issued:v:25:n:01:2022:p:55-87
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    References listed on IDEAS

    as
    1. Nguyen, Nam H. & Phan, Hieu V., 2017. "Policy Uncertainty and Mergers and Acquisitions," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 52(2), pages 613-644, April.
    2. Pástor, Ľuboš & Veronesi, Pietro, 2013. "Political uncertainty and risk premia," Journal of Financial Economics, Elsevier, vol. 110(3), pages 520-545.
    3. Ling, David C & Naranjo, Andy & Ryngaert, Michael D, 2000. "The Predictability of Equity REIT Returns: Time Variation and Economic Significance," The Journal of Real Estate Finance and Economics, Springer, vol. 20(2), pages 117-136, March.
    4. Bonaime, Alice & Gulen, Huseyin & Ion, Mihai, 2018. "Does policy uncertainty affect mergers and acquisitions?," Journal of Financial Economics, Elsevier, vol. 129(3), pages 531-558.
    5. Jamie Alcock & John Glascock & Eva Steiner, 2013. "Manipulation in U.S. REIT Investment Performance Evaluation: Empirical Evidence," The Journal of Real Estate Finance and Economics, Springer, vol. 47(3), pages 434-465, October.
    6. repec:bla:jfinan:v:59:y:2004:i:3:p:1125-1165 is not listed on IDEAS
    7. Nagar, Venky & Schoenfeld, Jordan & Wellman, Laura, 2019. "The effect of economic policy uncertainty on investor information asymmetry and management disclosures," Journal of Accounting and Economics, Elsevier, vol. 67(1), pages 36-57.
    8. David C. Ling & Andy Naranjo, 2015. "Returns and Information Transmission Dynamics in Public and Private Real Estate Markets," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 43(1), pages 163-208, March.
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