Are Value Stocks More Exposed to Disaster Risk? Evidence from Extreme Weather Events

45 Pages Posted: 4 Jan 2017 Last revised: 5 Jul 2017

See all articles by Matthew Lanfear

Matthew Lanfear

EDHEC Business School

Abraham Lioui

EDHEC Business School

Mark Siebert

EDHEC Business School

Date Written: July 4, 2017

Abstract

Hurricanes represent exogenous shocks with consequences for the real economy similar to those commonly-considered as consumption disasters. We investigate how the abnormal effects due to landfall hurricanes on stock returns, illiquidity and tail risk vary across decile portfolios of stocks sorted by market equity (ME) and book-to-market equity ratio (BE/ME). Abnormal returns, illiquidity and tail risk are negatively related to firm size, with small-firm stocks exhibiting a larger negative abnormal effect than big-firm stocks. For portfolios sorted by BE/ME that include Nasdaq stocks, Value and Growth stocks at the extremes of the decile range exhibit the most negative abnormal return, illiquidity and tail risk effects. Moreover, deterioration in liquidity and tail risk does explain a fraction of the abnormal returns. Value stocks are systematically more impacted than Growth stocks. As a consequence, we conclude that Value stocks are more prone to disaster risk than Growth stocks. However, this seems to be concentrated in very small stocks rather than a pervasive phenomenon. Although the SMB and HML factors may proxy for distress risk, they do not appear to capture the specific distress risk shocks posed by hurricane events.

Keywords: event study, extreme weather events, hurricanes, illiquidity, rare disasters, size and value effects, tail risk

JEL Classification: G14, G17, Q54

Suggested Citation

Lanfear, Matthew and Lioui, Abraham and Siebert, Mark, Are Value Stocks More Exposed to Disaster Risk? Evidence from Extreme Weather Events (July 4, 2017). Available at SSRN: https://ssrn.com/abstract=2892948 or http://dx.doi.org/10.2139/ssrn.2892948

Matthew Lanfear

EDHEC Business School ( email )

France

Abraham Lioui (Contact Author)

EDHEC Business School ( email )

France

Mark Siebert

EDHEC Business School ( email )

58 rue du Port
Lille, 59046
France

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