The Effects of Uncertainty on Market Liquidity: Evidence from Hurricane Sandy

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.

Rehse, Dominik, Ryan Riordan, Nico Rottke and Joachim Zietz (2018), The Effects of Uncertainty on Market Liquidity: Evidence from Hurricane Sandy, ZEW Discussion Paper No. 18-024, Mannheim, published in: Journal of Financial Economics.