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

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  • Guoying Deng
  • Li Gan
  • Manuel A. Hernandez

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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19515.

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Date of creation: Oct 2013
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Handle: RePEc:nbr:nberwo:19515

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Cited by:
  1. Matthew A. Cole & Robert J R Elliott & Toshihiro Okubo & Eric Strobl, 2014. "Natural Disasters and the Birth, Life and Death of Plants: The Case of the Kobe Earthquake," Working Papers, Department of Research, Ipag Business School 2014-114, Department of Research, Ipag Business School.

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