The effects of uncertainty on market liquidity: Evidence from Hurricane Sandy

Dominik Rehse · Ryan Riordan · Nico B. Rottke · Joachim Zietz

145 citations0/0 files storedJournal of Financial Economics

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Financial Markets and Investment Strategies Market Dynamics and Volatility COVID-19 Pandemic Impacts

Abstract

We test the effects of uncertainty on market liquidity using Hurricane Sandy as a natural experiment. Given the unprecedented strength, scale, and nature of the storm, the potential damages of a landfall near the Greater New York area were unpredictable and therefore uncertain. Using a difference-in-differences setting, we compare the market reactions of Real Estate Investment Trusts (REITs) with and without properties in the widely published evacuation zone of New York City prior to landfall. We find relatively less trading and wider bid-ask spreads in affected REITs. The results confirm theory on the detrimental effects of uncertainty on market functioning.

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References

1985Bid, ask and transaction prices in a specialist market with heterogeneously informed traders 2011Robust Inference With Multiway Clustering 2008Forecasting Default with the Merton Distance to Default Model 2014Fluctuations in Uncertainty 1981Optimal dealer pricing under transactions and return uncertainty 2017Estimating economic damage from climate change in the United States 2018Really Uncertain Business Cycles 1991An Experimental Study of Competitive Market Behavior

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