REITs and the Taper Tantrum
| Date | 01 August 2016 |
| DOI | https://doi.org/10.1108/JPIF-03-2016-0020 |
| Pages | 457-464 |
| Published date | 01 August 2016 |
| Author | Stephen Lee |
| Subject Matter | Property management & built environment,Real estate & property,Property valuation & finance |
REITs and the Taper Tantrum
Stephen Lee
Cass Business School, City University London, London, UK
Abstract
Purpose –The purpose of this paper is to empirically examine the effect on US stock, bond and
real estate investment trust (REIT) prices triggered by the US Federal Reserve Chairman Ben
Bernanke’s announcement of a possible intent to unwind, or taper, quantitative easing (QE).
In particular, the author assessed whether the effect of the “Taper Tantrum”was fundamental or
financial on financial markets.
Design/methodology/approach –The methodology used to determine whether the effect of the
“Taper Tantrum”was fundamental or purely financial is that suggested by French and Roll (1986) as
extended by Tuluca et al. (2003). The analysis is based on daily data for large cap stocks, small
cap stocks, long-term bonds and REITs for 18 months before Ben Bernanke’s announcement and for
18 months after the announcement.
Findings –The results show that the “Taper Tantrum”had a fundamental, rather than a financial
effect on all asset classes, especially so for REITs.
Practical implications –The author also found that in the post-taper period following Ben
Bernanke’s announcement the correlation of REITs with stocks decreased compared with pre-taper
period, whereas the correlation of REITS with bonds increased substantially. In other words,
the “Taper Tantrum”had a profound effect on the risk/return benefits of including REITs in the
US mixed-asset portfolio.
Originality/value –This is the first paper to examine the effect of the “Taper Tantrum”on REITs.
Keywords Bonds, REITs, Stocks, Daily and monthly data, Fundamental or financial impacts,
Taper Tantrum
Paper type Research paper
Introduction
Following the global financial crisis the Federal Open Market Committee in the USA
has been using bond purchases since November 2008, so called quantitative easing
(QE), to reduce long-term interest rates to support housing markets, employment and
real activity. Following positive economic news in the Spring of 2013, however, the
Federal Reserve Chairman Ben Bernanke testified to Congress on 22 May 2013 that
the Fed would likely start tapering QE, by slowing the pace of its bond purchases later
in the year, conditional on continuing good economic news.
Ben Bernanke’s announcement lead to what has been called the “Taper Tantrum”
with US large cap stocks,small cap stocks and bonds falling 0.83, 1.67 and0.29 per cent,
respectively, on the 22 May 2013 (see, Table I). Stock and bond markets, however,
recovered very quickly as investors realized there was no need for a massive panic
(see, Figure 1). In contrast, real estate investment trusts (REITs) not only showed much
bigger losses on the day of the announcement (2.57 per cent) but continued to decline
for the rest of the year.
Importantly, the volatility of daily REIT returns rose following Ben Bernanke’s
announcement, whereas the daily volatility of stocks and bonds fell (see, Table II).
The increase in volatility of REIT prices may reflect changes in the fundamental
economic determinants such as: expected earnings, interest rates, real growth and
inflation. Alternatively, the increase in volatility may simply reflect the effects of
increased uncertainty in the market. In order, to sort out whether the effect of the
“Taper Tantrum”had a fundamental or purely financial impact on US financial
Journal of Property Investment &
Finance
Vol. 34 No. 5, 2016
pp. 457-464
©Emerald Group Publis hing Limited
1463-578X
DOI 10.1108/JPIF-03-2016-0020
Received 23 March 2016
Accepted 14 May 2016
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1463-578X.htm
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REITs and
the Taper
Tantrum
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