Does Extreme Rainfall Lead to Heavy Economic Losses in the Food Industry?

Edimilson Lucas, Wesley Mendes-Da-Silva and Gustavo Araujo

No 462, Working Papers Series from Central Bank of Brazil, Research Department

Abstract: Natural extreme events have been occurring more frequently with growing impacts in well-being, mainly in emerging economies. Therefore, the need for more accurate information for managing such impacts has grown. In response to this issue, financial literature has been focusing on the assessment of economic impacts that arise from extreme weather changes. However, these efforts have imparted little attention to the economic impact analysis at the corporate level. To reduce this gap, this article analyzes the impact of extreme rainfall events on the food industry in an emerging economy that is a prominent player in this sector, Brazil. For this purpose, we use the ARGARCH-GPD hybrid methodology to identify whether extreme rainfalls affect stock prices of food companies. The results indicate that these events have a strong impact on the stock returns: In more than half of the days immediately after extreme rain events that occurred between 2.28.2005 and 12.30.2014, returns were significantly low, causing average daily losses of 1.97%. These results point to the need for more accurate financial management to hedge against weather risk.

Date: 2017-08
New Economics Papers: this item is included in nep-agr, nep-env and nep-rmg
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