Measuring the Impact of Natural Disasters on Capital Markets: An Empirical Application Using Intervention Analysis

Posted: 17 Apr 2005

See all articles by Andrew C. Worthington

Andrew C. Worthington

Griffith University

Abbas Valadkhani

University of Wollongong - School of Economics and Information Systems

Abstract

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.

Keywords: Australia, Natural events, disasters and catastrophes, market returns, intervention analysis, ARIMA

JEL Classification: C22, G12, G14, G22

Suggested Citation

Worthington, Andrew C. and Valadkhani, Abbas, Measuring the Impact of Natural Disasters on Capital Markets: An Empirical Application Using Intervention Analysis. Available at SSRN: https://ssrn.com/abstract=694961

Andrew C. Worthington

Griffith University ( email )

170 Kessels Road
Nathan, Queensland 4111
Australia
+61 (0)7 3735 4273 (Phone)
+61 (0)7 3735 3719 (Fax)

Abbas Valadkhani (Contact Author)

University of Wollongong - School of Economics and Information Systems ( email )

Northfields Avenue
Wollongong, New South Wales 2522
Australia

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