Catastrophe effects on stock markets and catastrophe risk securitization

Abstract

Purpose -Conventional wisdom states that catastrophe risk securities show no or little correlation with stock and bond markets, and offer significant attractions to investors providing a good diversification of risks. This study examines the correlation between catastrophe risk securities and portfolios of other equities by analyzing catastrophe effects on the Japanese stock market. Design/methodology/approach -Using catastrophe data from SwissRe Sigma publications and stock returns from the Pacific-Basin Capital Markets database, this paper analyzes stock and abnormal returns in the Japanese stock market using event study methodology. Findings -For the Japanese stock market as a whole, there is no significant catastrophe effect. The results indicate a significant negative correlation between catastrophe loss amount and the insurance industry's equity returns and abnormal returns, a significant positive correlation with the construction industry, but no significant correlation with the real estate industry. This paper also analyzes the impact of catastrophe causalities. The results show little evidence on the significance of these variables.Originality/value -This study provides important insights to the insurance/reinsurance industry in the Japanese risk market for catastrophe property and mortality risk securitization and to investors who are interested in further improvement of their portfolio risk/return profile by including catastrophe risk securities.

Is stock market in Sub-Saharan Africa resilient to health shocks?

“…), on stock markets returns in diverse parts of the globe. Most of these studies focused on natural disasters and financial markets and mostly event or case studies and on specific industries such as real estate, insurance and construction (Tao, 2014;Yang et al, 2008;Worthington and Valadkhani, 2004). Others examined "contagion" impacts in international capital markets, including the crash of the Mexican peso in 1994, the 1997-1998 crisis in East-Asia and the 1998 crisis in Russia (Ahlgren and Antell, 2010;Rodriguez, 2007;Forbes, 2004Forbes, , 2002Forbes and Rigobon, 2002).…”

Do Earthquakes Shake Stock Markets?

“…The literature analyzing the impact of natural disasters on capital markets is scarce and consists mainly of case and event studies estimating the impact of “domestic” disasters on specific sectors such as insurance, construction, and real estate [ 13 , 14 , 15 , 16 , 17 , 18 ]. A number of studies have analyzed “contagion” effects in international financial markets, for example following the Mexican peso collapse in 1994, the East-Asian crisis in 1997–1998, and the Russian crisis in 1998 [ 19 , 20 , 21 ].…”

Convergence of Insurance and Financial Markets: Hybrid and Securitized Risk‐Transfer Solutions

“…34 34 Empirical evidence that catastrophes are uncorrelated with the stock market in Japan is provided in an event study by Yang, Wang, and Chen (2008), which shows no significant catastrophe effect for the Japanese stock market as a whole, although catastrophes negatively affect insurance stocks and positively affect construction firm stocks. …”