The effects of natural disasters on stock market return and volatility in Hong Kong

Other Publication ResearchOnline@JCU
Nguyen, Thi Minh Trang;Chaiechi, Taha
Abstract

Hong Kong is located at the Pearl River Delta, which is among the urban areas that are most vulnerable to natural disasters in the world. The research suggests that environmental factors such as climate factors can have significant effects on the performance of stock markets. The aim of this chapter is thus to explore the effects of natural disasters on the stock market return and volatility in Hong Kong, over various event windows from 1 day to 2 months postdisaster. An ARMAX (autoregressive moving average with exogenous regressor)–EGARCHX (exponential generalised autoregressive conditional heteroskedasticity with exogenous regressor) model, which is an augmentation of a standard ARMA process with an EGARCH (exponential generalized autoregressive conditional heteroskedastic) process and an intervention variable X, was used for empirical analysis. The results reveal that natural disasters have adverse effects on the Hong Kong Stock Market return and volatility with increasing magnitude. However, the adverse effects only survive for a short period of up to 12 days after the events before dying out afterward. In addition, the presence of asymmetric volatility indicates that market return volatility is higher during extreme weather events. Higher return volatility induces a higher probability of a bear market.

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Economic Effects of Natural Disasters: theoretical foundations, methods, and tools

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978-0-12-817465-4

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Pages Count

10

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Elsevier

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London, UK

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DOI

10.1016/B978-0-12-817465-4.00002-9