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


  • Andrew Worthington
  • Abbas Valadkhani


The impact of natural disasters on the Australian equity market is examined. The data set employed consists of daily price and accumulation returns over the period 31 December 1982-1 January 2002 for the All Ordinaries Index (AOI) and a record of 42 severe storms, floods, cyclones, earthquakes and bushfires (wildfires) during this period with an insured loss in excess of A$5 mil. and/or total loss in excess of A$100 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 that 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.

Suggested Citation

  • Andrew Worthington & Abbas Valadkhani, 2004. "Measuring the impact of natural disasters on capital markets: an empirical application using intervention analysis," Applied Economics, Taylor & Francis Journals, vol. 36(19), pages 2177-2186.
  • Handle: RePEc:taf:applec:v:36:y:2004:i:19:p:2177-2186
    DOI: 10.1080/0003684042000282489

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    References listed on IDEAS

    1. Zeckhauser, Richard J, 1996. "The Economics of Catastrophes," Journal of Risk and Uncertainty, Springer, vol. 12(2-3), pages 113-140, May.
    2. Horwich, George, 2000. "Economic Lessons of the Kobe Earthquake," Economic Development and Cultural Change, University of Chicago Press, vol. 48(3), pages 521-542, April.
    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 105-118, February.
    4. 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.
    5. Sara Borden & Asani Sarkar, 1996. "Securitizing property catastrophe risk," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 2(Aug).
    6. 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.
    7. 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.
    8. 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.
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    Cited by:

    1. Tylor Orme, 2014. "The short- and long-term effectiveness of anti-piracy laws and enforcement actions," Journal of Cultural Economics, Springer;The Association for Cultural Economics International, vol. 38(4), pages 351-368, November.
    2. Eduardo Cavallo & Ilan Noy, 2009. "The Economics of Natural Disasters: A Survey," Research Department Publications 4649, Inter-American Development Bank, Research Department.
    3. repec:eee:riibaf:v:41:y:2017:i:c:p:556-576 is not listed on IDEAS
    4. 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.
    5. Bourdeau-Brien, Michael & Kryzanowski, Lawrence, 2017. "The impact of natural disasters on the stock returns and volatilities of local firms," The Quarterly Review of Economics and Finance, Elsevier, vol. 63(C), pages 259-270.
    6. repec:dug:journl:y:2016:i:2:p:217-227 is not listed on IDEAS
    7. Dumitru-Cristian Oanea & Stela Jakova, 2016. "Impact of SNB Decision to Unpeg the Franc from Euro on Financial Markets: Event Study Approach," Acta Universitatis Danubius. OEconomica, Danubius University of Galati, issue 12(2), pages 217-227, April.
    8. 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.
    9. Benjamin Collier & Ani L. Katchova & Jerry R. Skees, 2011. "Loan portfolio performance and El Niño, an intervention analysis," Agricultural Finance Review, Emerald Group Publishing, vol. 71(1), pages 98-119, May.
    10. Fink, Jason D. & Fink, Kristin E., 2013. "Hurricane forecast revisions and petroleum refiner equity returns," Energy Economics, Elsevier, vol. 38(C), pages 1-11.
    11. 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.
    12. Dumitru-Cristian OANEA & Ștefan-Bogdan VASILESCU, 2015. "Impact Of Fsa Decision No. 23 From 5th February, 2014: Event Study Approach," Network Intelligence Studies, Fundația Română pentru Inteligența Afacerii, Editorial Department, issue 6, pages 109-116, December.
    13. Vikash Ramiah, 2013. "Effects of the Boxing Day tsunami on the world capital markets," Review of Quantitative Finance and Accounting, Springer, vol. 40(2), pages 383-401, February.
    14. Yu Xiao, 2011. "Local Economic Impacts Of Natural Disasters," Journal of Regional Science, Wiley Blackwell, vol. 51(4), pages 804-820, October.

    More about this item

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies


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