Do People Overreact? Evidence from the Housing Market after the Wenchuan Earthquake

50 Pages Posted: 11 Oct 2013

See all articles by Guoying Deng

Guoying Deng

Sichuan University

Li Gan

Texas A&M University - Department of Economics; National Bureau of Economic Research (NBER)

Manuel A. Hernandez

International Food Policy Research Institute (IFPRI)

Date Written: October 2013

Abstract

This paper uses the 2008 Wenchuan earthquake in China as a natural experiment to examine how the housing market reacted to this unforeseen, extreme event. We use a unique transaction dataset for new (under construction) apartment units to analyze the pricing behavior of units in lower versus upper floors before and after the earthquake. We observe that average housing prices decreased after the tremor. However, the relative price of low to high floor units, particularly units located in the first and second floor, considerably increased for several months after the earthquake. This relative pricing pattern is in line with a higher risk perception and fear, triggered after the tremor, of living in upper floors. Additional robustness checks support the apparent overreaction of individuals to a dramatic event.

Suggested Citation

Deng, Guoying and Gan, Li and Hernandez, Manuel A., Do People Overreact? Evidence from the Housing Market after the Wenchuan Earthquake (October 2013). NBER Working Paper No. w19515. Available at SSRN: https://ssrn.com/abstract=2338888

Guoying Deng (Contact Author)

Sichuan University ( email )

Li Gan

Texas A&M University - Department of Economics ( email )

5201 University Blvd.
College Station, TX 77843-4228
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Manuel A. Hernandez

International Food Policy Research Institute (IFPRI) ( email )

1201 Eye St, NW,
Washington, DC 20005
United States

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