            Levon Goukasian 1 Mehdi Majbouri 2 March 2007  In this paper we study the effect of unexpected changes in monetary policy on the equity returns of real# estate#related industries, using federal funds futures prices to extract unexpected changes in the Federal Funds Target Rate and employing it as a measure of monetary policy shocks. We find that over the 1989 to 2005 sample period covered in our study, a hypothetical unexpected rate cut of 25 basis points is associated with an increase of about 170 basis points in the value#weighted returns of real#estate#related industries. This effect varies across industries and is the strongest in the Building & Material Supply and Mortgage & Banking industries and weakest in REITs and Utilities. We show that the Residential REITs respond to the monetary policy actions differently than other industries in certain times. In times, in which monetary policy may impact housing affordability, we find that Residential REITs favorably react to the unexpected rate hikes in anticipation of higher rental cash flows, unlike all the other industries. This makes the Residential REITs good candidates for hedging the risk of unexpected rate hikes. There is also some evidence of asymmetry in the responses of the industry returns to the monetary policy actions. A strong stock price response to reversals in the direction of the Federal Reserve’s monetary policy is reported.   E4, G1   Real Estate#Related Industries, REIT, Monetary Policy, Surprise changes in fed funds target rate, Fed Funds Futures. * We would like to thank Daniel Grombacher of the CBOT and Ray Sasaki of Sempra Energy for providing data and valuable information on Federal Funds Futures. 1 Business Administration Division, Seaver College, Pepperdine University, Malibu, CA 90263#4237. Tel: (310) 506#4425, email: levon.goukasian@pepperdine.edu. 2 University of Southern California, Department of Economics. 3620 South Vermont Ave., Kaprielian Hall 300, Los Angeles, CA 90089#0253. Tel: (626) 300 8684 email: majbouri@usc.edu.