Have U.S. Financial Institutions' Real Estate Investments Exhibited "Trend-Chasing" Behavior?

This paper uses real estate investment data for major groups of U.S. financial institutions - commercial banks, thrifts, and life insurance companies - to evaluate their investment timing performance over the 1970 - 1989 period. Our major finding is that real estate investments by commercial banks and thrifts have largely been driven by past real estate and market returns rather than by future expected returns. This apparent "trend-chasing" investment strategy - of buying high and selling low - offers an explanation for the poor performance of their real estate investments. We argue that imposing market value accounting on such institutions may actually reinforce their "trend-chasing" behavior. © 1997 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology