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Weekly Updates5. CONCLUSIONS
The initial view of the terrorist attacks of 9/11 was that they would have a serious impact on the economy of the US in general and the New York in particular. However, with hindsight we can see that the US economy was already suffering and the 9/11 attacks did not have a significant effect on economic growth either nationally or in New York. Nonetheless, commentators argued that the effect of 9/11 terrorists attacks could be especially hard for real estate markets as it would raise uncertainty and so hurt the NOI of institutional investment-grade real estate, which suggests that the effects of the attack on the World Trade Center could be fundamental and long lasting for real estate securities. In contrast, others argued that when catastrophic events, such as the attack on the World Trade Center on 9/11, occurs investor risk aversion increases dramatically but that the increase is only short lived. This implies that the 9/11 attacks would have only a financial impact on real estate security returns and so would be transitory. In other words, the effects of the 9/11 attacks on real estate securities could be either financial and persistent or fundamental and transitory.
In order to discriminate between fundamental and financial effects of major events, such as 9/11, on real estate securities prices we adopt the approach suggested by French and Roll (1986), as extended by Tuluca et al (2003) using data from the post- and pre- crisis period for a number of REIT indexes. In particular, we examine the variance ratios of daily and monthly data and interpret an increase in the difference as a fundamental (informational) effect and a decrease as a purely financial (noise trading) effect. In general, we find that the greatest increases in volatility were at the daily, rather than monthly, frequencies which suggests that much of the increased volatility following the 9/11 crisis reflected noise trading effects rather than any fundamental impact on future capital values or expected earnings of US real estate securities. Thus we conclude the impact of 9/11 on US real estate securities was financial and transitory, rather than fundamental and persistent.
Received 25 August 2006; accepted 6 November 2006
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Andrea GHENO (1) and Stephen L. LEE (2)
(1) Department of Economics, University of Rome III, Via Silvio D'Amico 111, 00145, Rome, Italy. E-mail: gheno@uniroma3.it
(2) Faculty of Finance, Cass Business School, City University, 106 Bunhill Row, London EC1Y 8TZ, UK. E-mail: Stephen.Lee.1@city.ac.uk
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