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Measuring the impact of natural disasters on capital markets: An empirical application using intervention analysis

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Author Info
Andrew Worthington
Abbas Valadkhani
Abstract

This paper examines the impact of natural disasters on the Australian equity market. The data set employed consists of daily price and accumulation returns over the period 31 December 1982 to 1 January 2002 for the All Ordinaries Index (AOI) and a record of forty-two severe storms, floods, cyclones, earthquakes and bushfires (wildfires) during this period with an insured loss in excess of AUD5 mil. and/or total loss in excess of AUD100 mil. Autoregressive moving average (ARMA) models are used to model the returns and the inclusion of news arrival in the form of the natural disasters is specified using intervention analysis. The results indicate bushfires, cyclones and earthquakes have a major effect on market returns, unlike severe storms and floods. The net effects can be positive and/or negative with most effects being felt on the day of the event and with some adjustment in the days that follow.

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File URL: http://www.bus.qut.edu.au/faculty/schools/economics/documents/discussionPapers/2003/DP%20154%20Worthington%20&%20Valadkhani.pdf
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Publisher Info
Paper provided by School of Economics and Finance, Queensland University of Technology in its series School of Economics and Finance Discussion Papers and Working Papers Series with number 154.

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Date of creation: 20 Sep 2003
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Handle: RePEc:qut:dpaper:154

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Related research
Keywords: Natural events disasters and catastrophes market returns intervention analysis ARMA

Find related papers by JEL classification:
C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies

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  1. Zeckhauser, Richard J, 1996. "The Economics of Catastrophes," Journal of Risk and Uncertainty, Springer, vol. 12(2-3), pages 113-40, May.
  2. Skidmore, Mark, 2001. "Risk, natural disasters, and household savings in a life cycle model," Japan and the World Economy, Elsevier, vol. 13(1), pages 15-34, January. [Downloadable!] (restricted)
  3. St Pierre, Eileen F, 1998. "The Impact of Option Introduction on the Conditional Return Distribution of Underlying Securities," The Financial Review, Eastern Finance Association, vol. 33(1), pages 105-18, February.
  4. Horwich, George, 2000. "Economic Lessons of the Kobe Earthquake," Economic Development and Cultural Change, University of Chicago Press, vol. 48(3), pages 521-42, April.
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