Nuclear Hazard and Asset Prices: Implications of Nuclear Disasters in the Cross-Sectional Behavior of Stock Returns

Abstract

Using stock return data for the Japanese equity market, for the period from July 1983 to June 2018, we analyze the effect of major nuclear disasters worldwide on Japanese discount rates. For that purpose, we compare the performance of the capital asset pricing model (CAPM) conditional on the event of nuclear disasters with that of the classic CAPM and the Fama–French three- and five-factor models. In order to control for nuclear disasters, we use an instrument that allows us to parameterize the linear stochastic discount factor of the conditional CAPM and transform the classic CAPM into a three-factor model. In this regard, the use of nuclear disasters as an explanatory variable for the cross-sectional behavior of stock returns is a novel contribution of this research. Our results suggest that nuclear disasters account for a large fraction of the variation of stock returns, allowing the CAPM to perform similarly to the Fama–French three- and five-factor models. Furthermore, our results show that, in general, nuclear disasters are positively related to the expected returns of a large number of assets under study. Our results have important implications for the task of estimating the cost of equity and constitute a step forward in understanding the relationship between equity risk premiums and nuclear disasters.

Research on the Granger Causality Experiment of Fukushima Nuclear Wastewater Discharge on Changes in Oil Market Prices

“…The Granger causality test assumes that the time series of variables y and x contain all of the expected data for each of these variables. The following regression needs to be computed for the test [16,17]:…”

Do Financial Liabilities Matter in “Size Effect”? Evidence from the Chinese A-Share Market

“…In this paper, we applied several asset pricing models to test the excess return of the portfolio i constructed by the EV factor, such as CAPM, FF three-factor, and FF fivefactor [27,28]. The basic models of these methods are described as follows.…”