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Have U.S. Financial Institutions' Real Estate Investments Exhibited "Trend-Chasing" Behavior?

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  • Jianping Mei
  • Anthony Saunders

Abstract

This paper uses real estate investment data for major groups of U.S. financial institutions - commercial banks, thrifts, and life insurance companies - to evaluate their investment timing performance over the 1970 - 1989 period. Our major finding is that real estate investments by commercial banks and thrifts have largely been driven by past real estate and market returns rather than by future expected returns. This apparent "trend-chasing" investment strategy - of buying high and selling low - offers an explanation for the poor performance of their real estate investments. We argue that imposing market value accounting on such institutions may actually reinforce their "trend-chasing" behavior. © 1997 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology

Suggested Citation

  • Jianping Mei & Anthony Saunders, 1997. "Have U.S. Financial Institutions' Real Estate Investments Exhibited "Trend-Chasing" Behavior?," The Review of Economics and Statistics, MIT Press, vol. 79(2), pages 248-258, May.
    • Handle: RePEc:tpr:restat:v:79:y:1997:i:2:p:248-258
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    Cited by:

    1. Berger, Allen N. & Udell, Gregory F., 2004. "The institutional memory hypothesis and the procyclicality of bank lending behavior," Journal of Financial Intermediation, Elsevier, vol. 13(4), pages 458-495, October.
    2. Marco Sorge, 2004. "Stress-testing financial systems: an overview of current methodologies," BIS Working Papers 165, Bank for International Settlements.
    3. Tajik, Mohammad & Aliakbari, Saeideh & Ghalia, Thaana & Kaffash, Sepideh, 2015. "House prices and credit risk: Evidence from the United States," Economic Modelling, Elsevier, vol. 51(C), pages 123-135.
    4. Sorge, Marco & Virolainen, Kimmo, 2006. "A comparative analysis of macro stress-testing methodologies with application to Finland," Journal of Financial Stability, Elsevier, vol. 2(2), pages 113-151, June.
    5. Frank J. Fabozzi & Iason Kynigakis & Ekaterini Panopoulou & Radu S. Tunaru, 2020. "Detecting Bubbles in the US and UK Real Estate Markets," The Journal of Real Estate Finance and Economics, Springer, vol. 60(4), pages 469-513, May.
    6. Acharya, Viral & Naqvi, Hassan, 2012. "The seeds of a crisis: A theory of bank liquidity and risk taking over the business cycle," Journal of Financial Economics, Elsevier, vol. 106(2), pages 349-366.
    7. Fang, Hao & Lu, Yang-Cheng & Shieh, Joseph.C.P. & Lee, Yen-Hsien, 2021. "The existence and motivations of irrational loan herding and its impact on bank performance when considering different market periods," International Review of Economics & Finance, Elsevier, vol. 73(C), pages 420-443.
    8. Allen N. Berger & Omrane Guedhami & Destan Kirimhan & Xinming Li & Daxuan Zhao, 2024. "Universal banking powers and liquidity creation," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 55(6), pages 764-781, August.

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