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This study examines the reaction of the financial markets to the terrorist attack on the World Trade Center and how their behavior compared to the subsequent resolution in the corresponding real asset markets. This event provides an ideal setting to evaluate the accuracy of the market’s reaction to external shocks since, unlike almost all studies of economic events, this tragedy was certainly unanticipated and thus absent from pre-existing market expectations, its overall impact was unclear, and the subsequent week of market closure gave market participants sufficient time to sort out the complex impact of the event on market prices. Our analysis of Real Estate Investment Trusts (REITs) with New York office exposure outside of the downtown area shows that, during the period of market closure and the first trading day, the equity market did not accurately anticipate how this event would impact office REITs. Specifically, we find that REITs with significant exposure to the New York market showed significant gains relative to REITs without New York exposure (an average difference of 4.057% of market value from the close on September 10 to the opening on September 17), and that this abnormal return disappeared only in November 2001. However, an examination of the underlying real asset market’s performance over the first few months after September 11 shows that New York properties significantly under-performed similar office properties in the U.S. This evidence provides little support for the notion that financial markets can rapidly and correctly price significant shocks to the underlying economy.


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