Doctoral thesis

Is Climate Change Affecting the Stock Market? A Study of the Impact of Extreme Weather Events on Stock Returns, Volatility and Liquidity

An Industry Comparison of the Impact of Extreme Weather Events on Stock Returns: Scientists forecast increasing extreme weather events over the coming decades due to climate change ...

Author(s) :

Mark Siebert, PhD

Chief Risk Officer Asia at National Australia Bank (Hong Kong)

Abstract :

An Industry Comparison of the Impact of Extreme Weather Events on Stock Returns: Scientists forecast increasing extreme weather events over the coming decades due to climate change. We examine the effect of North Atlantic hurricanes on U.S. stock returns over the period January 1990 to December 2014. For industry portfolios spanning the entire U.S. stock market, we find that the abnormal effect on stock returns is differentiated according to industry classification, hurricane intensity, landfall location, and estimated ex post financial damages. The market portfolio exhibits negative mean daily standardised abnormal returns of -0.0064 in the prelandfall period, -0.0015 on the event day and subsequent day, and is approximately -0.006 out to 30 days post-landfall. Aggregate figures for the market, however, conceal a wide variation in the abnormal effect by industry: in the pre-landfall period, abnormal returns range from -0.075 (Restaurants) to +0.071 (Oil) and over the 30-day post-landfall period, from -0.053 (Real Estate) to +0.041 (Gold). Many manufacturing-based and consumer-focused industry portfolios exhibit consistently negative abnormal returns over the event window. Conversely, portfolios of Gold, Oil, Hardware, Software, Banks and Trading stocks exhibit a consistently positive abnormal effect, possibly due to investors seeking stocks not negatively exposed to the effects of a hurricane. We find no evidence that market efficiency has increased over the period of our study, i.e., that market participants have incorporated the expected financial implications of hurricane events into their stock price expectations.

Idiosyncratic Volatility and Return Predictability: The Impact of Extreme Weather Events : We examine the impact of North Atlantic hurricanes on the idiosyncratic volatility of portfolios of U.S. stocks sorted by realised volatility. We find that the magnitude of the abnormal effect on idiosyncratic volatility increases with underlying portfolio volatility in absolute terms and decreases in relative terms. The magnitude of the effect is further related to hurricane intensity. In out-of-sample tests, we find weak evidence that hurricane events are a predictive variable for one-day ahead returns on an equal-weighted portfolio of stocks for the lower-volatility portfolios and the aggregate market portfolio after controlling for the business cycle. Finally, using portfolios of stocks sorted by industry classification, we find a differential abnormal effect on idiosyncratic volatility across industry portfolios.

Extreme Weather Events and Liquidity Shocks: We investigate the impact of hurricane events over the period 1990 to 2014 on the liquidity of portfolios of NYSE and NYSE MKT stocks sorted by liquidity, using four widely-used liquidity proxies: volume turnover, dollar-volume, bid-ask spread, and the illiquidity measure (ILLIQ) of Amihud (2002). We find abnormal liquidity effects for portfolios sorted by both their respective liquidity measures as well as by ILLIQ, with the lower liquidity portfolios showing the greatest abnormal effect.The magnitude of the abnormal effect is increasing with hurricane intensity, with major storms exhibiting a larger effect than minor storms. These abnormal effects may be due to an increase in systematic risk brought on by the expectation of the damaging effects of the hurricane events and the increased uncertainty on their micro and macroeconomic impacts.

Date : 08/02/2016
Thesis Committee :

Supervisor: Abraham Lioui, EDHEC Business School

External reviewer: Ekkehart Boehmer, Singapore Management University 

Other committee members: René Garcia and Raman Uppal, EDHEC Business School

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