The Effects of Natural Disasters on Stock Returns: An Empirical Approach

Abstract

This paper is concerned with estimating the effects of natural hazards on companies’ daily stock returns. Our main contribution is the novel approach of analyzing these effects on a company level in consideration of companies’ exposure to natural hazards. The damages to assets worldwide due to more frequent natural disasters owing to climate change are substantial. The highest estimate for climate change’s potential damages to global manageable assets is a staggering amount of $43 trillion. For this reason, it is important to understand the effects of natural hazards on companies’ stock returns to quantify and manage this substantial risk factor. The econometric model in the analysis is a static Fixed Effects model. We show that large (intensity based) earthquakes have a significant, negative effect on a company’s stock return on the same day. This negative effect increases with the company’s exposure to the earthquake. The pattern is similar for hurricanes but the negative effect is not as strong. Additionally, we find a significant, negative effect for large (fatality based) earthquakes on the return of a company with median exposure to the event. However, this effect is not increasing with the company’s exposure to the earthquake. The finding is the same for floods, but the negative effect is only weakly significant. Conclusively, some large natural hazards seem to have a negative effect on companies’ returns on the same day. We also find some evidence that this effect is increasing with companies’ exposure to these events.