European Real Estate Society 20 th Annual Conference Vienna, Austria July 3-6, 2013

1. Masaki Mori Seow Eng Ong Joseph T. L. Ooi Do investors pay attention to rare disaster risk? Evidence from earthquake risk in Japanese real estate investment trust market European Real Estate Society 20th Annual ConferenceVienna, Austria July 3-6, 2013

2. Data & Methods Results Research Framework Introduction Conclusions Background Great East Japan Earthquake, 2011 Mid Niigata Prefecture Earthquake, 2004

3. Data & Methods Results Research Framework Introduction Conclusions Background (without extremes)

4. Data & Methods Results Research Framework Introduction Conclusions Research question • Does earthquake risk perception affect return of J-REIT stocks? • Do investors alter their attention allocation once earthquake events provoke their fear and awareness toward earthquake?

5. Data & Methods Results Research Framework Introduction Conclusions Motivation from finance literature Rare events and asset pricing • A small probability of very bad things happening affects asset pricing dynamics (e.g., Rietz, 1988 and Barro, 2005) Limited attention • Investors show limited attention to relevant information • Investors shift attention when faced with greater uncertainty (e.g., Hirshleifer and Teoh, 2003)

6. Data & Methods Results Research Framework Introduction Conclusions Why earthquake risk? • Unpredictable, exogenous, and immediate (Japan Meteorological Agency)

7. Data & Methods Results Research Framework Introduction Conclusions Why J-REITs? • Portfolio level earthquake resistance measure in semi-annual financial reports (PML: Probable Maximum Loss) • Price information • We can examine dynamic effects of earthquake event on prices

8. Data & Methods Results Research Framework Introduction Conclusions Contributions • Implications for limited attention finance literature • Hopefully, will shed new light on the impacts of investors’ limited attention and attention allocation on asset price dynamics • Implications for REIT markets • How earthquake risk is priced in REITs • REIT markets are being developed in some earthquake prone countries

9. Data & Methods Results Research Framework Introduction Conclusions Data • Study period from Jan. 2004 to Apr. 2012 • Earthquake event data from the Japan Meteorological Agency • 43 REITs • Price data from DataStream and Association for Real Estate Securitization in Japan • PML and financial information from REIT DB and semi-annual financial reports

10. Data & Methods Results Research Framework Introduction Conclusions Methods • Outlier Robust regression (MM-estimation) • Dependent variable • J-REIT Index total return • Independent variable • # of earthquake equal to or greater than 5 strong in a month (log) • Google score as a robustness check • Sub portfolio analysis (1: low 2: middle 3: high) • PML score • Financial institution ownership • Foreign investor ownership

11. Data & Methods Results Research Framework Introduction Conclusions Methods • Event study • Earthquakes in Japan from Jan. 2004 to April. 2012 • “LARGE” --- 5-strong (26) and 6-weak (9) • “HUGE” --- 6-strong (3) and 7 (2) • Estimation period = -60 to -30 days • Event window = 0 to +10 days • Robust test • Abnormal return serial correlation • Event-induced volatility (Kolari & Pynnonen, 2010)

12. Data & Methods Results Research Framework Introduction Conclusions Total return vs. # of quakes ***, **, *, for 1%, 5%, and 10% significance, respectively

13. Data & Methods Results Research Framework Introduction Conclusions Total return vs. # of quakes

14. Data & Methods Results Research Framework Introduction Conclusions Daily abnormal return <Huge earthquakes (5)> <Large earthquakes (35)>

15. Data & Methods Results Research Framework Introduction Conclusions Range of cumulative abnormal return <5+ and 6->

16. Data & Methods Results Research Framework Introduction Conclusions Range of cumulative abnormal return <6+ and 7>

17. Data & Methods Results Research Framework Introduction Conclusions Summary of results • Sensitivity of REIT return to gradual change in earthquake risk perception is high • Low PML • High financial institution ownership • Rational price reaction after “large” earthquakes • Panic reaction after “huge” earthquakes • Sensitivity of REIT return to quick change in earthquake risk perception is high • High PML • High foreign investor ownership

18. Data & Methods Results Research Framework Introduction Conclusions Implications • Probability of rare events happening affects asset pricing dynamics • Investors shift attention allocation to rare event risk • Different types of investors show different processes of attention allocation to rare event risk

19. Data & Methods Results Research Framework Introduction Conclusions Directions for future research • Longer-term effects of huge earthquakes • Demand of tenants • Acquisition/disposition of properties by REITs • Impacts of financial institution ownership • Why do they respond more slowly than foreign investors?