Do Earthquakes Shake Stock Markets?

Abstract

This paper examines how major earthquakes affected the returns and volatility of aggregate stock market indices in thirty-five financial markets over the last twenty years. Results show that global financial markets are resilient to shocks caused by earthquakes even if these are domestic. Our analysis reveals that, in a few instances, some macroeconomic variables and earthquake characteristics (gross domestic product per capita, trade openness, bilateral trade flows, earthquake magnitude, a tsunami indicator, distance to the epicenter, and number of fatalities) mediate the impact of earthquakes on stock market returns, resulting in a zero net effect. However, the influence of these variables is market-specific, indicating no systematic pattern across global capital markets. Results also demonstrate that stock market volatility is unaffected by earthquakes, except for Japan.

Crash Beliefs from Investor Surveys

“…However, the empirical evidence on this link is mixed. Ferreira and Karali (2015) show that stock markets do not exhibit a significant reaction within five days of strong earthquakes. In contrast, Shiller (2000b) points to the Tokyo stock market reaction to the earthquake in Kobe, Japan on January 17, 1995, which measured at 7.2 on the Richter scale.…”

Climate Vulnerability and the Cost of Debt

“…climate-related natural disasters is predicted to rise as temperatures increase, with the prospect of significant negative effects on economic growth (Mei et al (2015); Mendelsohn et al (2015); Felbermayr and Groschl (2014); Alano and Lee (2016) ;Ferreira and Karali (2015)). Indeed, Fig-ure 2 shows the increase in economic losses due to major weather-related events over the last five decades.…”

Effect of catastrophic disaster in financial market contagion

“…This finding is somewhat contradictory with Luo (2012) who studied the impact of earthquake to the six major stock markets of Japan and surprisingly found the overall impact of earthquake is small and insignificant in all markets. However, they also recognized some specific shocks have both positive and negative effects depending on the shock-sensitive industries which partially acknowledge Ferreira and Karali's (2015) findings too. Wang and Kutan (2013) also agreed with Luo (2012) and conclude that natural disaster does not affect the composite stock market in Japan and USA but it significantly affects their insurance sector.…”

“…The immediate impact of earthquake is negative on equity market return but it increases positively (60%) after five days. The findings of Ferreira and Karali (2015) suggest that catastrophic disaster does not have any significant impact on market volatility except Japan because some selected macroeconomic indicators worked as a mediator for controlling the effect of the disaster. This finding is somewhat contradictory with Luo (2012) who studied the impact of earthquake to the six major stock markets of Japan and surprisingly found the overall impact of earthquake is small and insignificant in all markets.…”