Abstract

We study the impact of changes in US monetary policy on the equity returns of real-estate-related industries and the possible economic sources behind the response. We find that over the 1989 to 2005 sample period covered in our study, a hypothetical unexpected rate cut of 25 basis points is associated with an increase of about 170 basis points in the value-weighted returns of real estate-related industries. We find that monetary policy impacts the stock prices in real estate industries through its impact on the future expected stock returns and not on real interest rates or expected future dividends. The Residential REITs respond to the monetary policy actions differently than other industries in certain times. In times when monetary policy may impact housing affordability, we find that Residential REITs favorably react to the unexpected rate hikes in anticipation of higher rental cash flows, unlike all the other industries. This makes the Residential REITs good candidates for hedging the risk of unexpected rate hikes. There is also some evidence of asymmetry in the responses of the industry returns to the monetary policy actions. A strong stock price response to reversals in the direction of the Federal Reserve's monetary policy is reported.

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