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

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  • 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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Bibliographic 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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Keywords: Natural events; disasters and catastrophes; market returns; intervention analysis; ARMA;

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References

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  1. J. M. Albala-Bertrand, 2000. "Complex Emergencies versus Natural Disasters: An Analytical Comparison of Causes and Effects," Oxford Development Studies, Taylor & Francis Journals, vol. 28(2), pages 187-204.
  2. Sara Borden & Asani Sarkar, 1996. "Securitizing property catastrophe risk," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 2(Aug).
  3. Mark Skidmore & Hideki Toya, 2002. "Do Natural Disasters Promote Long-Run Growth?," Economic Inquiry, Western Economic Association International, vol. 40(4), pages 664-687, October.
  4. Ada Ho & Alan Wan, 2002. "Testing for covariance stationarity of stock returns in the presence of structural breaks: an intervention analysis," Applied Economics Letters, Taylor & Francis Journals, vol. 9(7), pages 441-447.
  5. 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.
  6. 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.
  7. 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.
  8. Zeckhauser, Richard J, 1996. "The Economics of Catastrophes," Journal of Risk and Uncertainty, Springer, vol. 12(2-3), pages 113-40, May.
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Cited by:
  1. Andrew Worthington & Abbas Valadkhani, 2005. "Catastrophic Shocks and Capital Markets: A Comparative Analysis by Disaster and Sector," Global Economic Review, Taylor & Francis Journals, vol. 34(3), pages 331-344.
  2. Collier, Benjamin & Katchova, Ani L. & Skees, Jerry R., 2010. "Loan Portfolio Performance and El Niño, an Intervention Analysis," 2010 Annual Meeting, February 6-9, 2010, Orlando, Florida 56217, Southern Agricultural Economics Association.
  3. Hood, Matthew & Kamesaka, Akiko & Nofsinger, John & Tamura, Teruyuki, 2013. "Investor response to a natural disaster: Evidence from Japan's 2011 earthquake," Pacific-Basin Finance Journal, Elsevier, vol. 25(C), pages 240-252.
  4. Eduardo Cavallo & Ilan Noy, 2009. "The Economics of Natural Disasters - A Survey," Working Papers 200919, University of Hawaii at Manoa, Department of Economics.
  5. Gürtler, M. & Hibbeln, M. & Winkelvos, C., 2012. "The impact of the financial crisis and natural catastrophes on CAT bonds," Working Papers IF40V1, Technische Universität Braunschweig, Institute of Finance.
  6. Fink, Jason D. & Fink, Kristin E., 2013. "Hurricane forecast revisions and petroleum refiner equity returns," Energy Economics, Elsevier, vol. 38(C), pages 1-11.

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