AN EXAMINATION OF MARKET REACTION WHEN NEGATIVE EMOTIONS RUN HIGH AMIDST A TROPICAL CYCLONE

Chun-I Lee and Chueh-Yung Tsao
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Chun-I Lee: Department of Finance, Loyola Marymount University, Los Angeles, California, USA
Chueh-Yung Tsao: ��Department of Industrial and Business Management, Chang Gung University, No. 259 Wenhua 1st Rd., Guishan District, Taoyuan City 33302, Taiwan

Climate Change Economics (CCE), 2023, vol. 14, issue 02, 1-33

Abstract: We find evidence of negative returns, greater volatility, higher turnover, and lower liquidity around a tropical cyclone. Before the land warnings are issued, there is significant under-reaction by investors. Throughout the storm, market volatility increases with negative returns. This leverage effect is similarly present in liquidity before and after the storm. The abnormal returns, volatility, and activities are not related to the characteristics of the storm and exist after the weather effect and various determinants have been accounted for. These findings strongly suggest that underlying all the negative market reaction is the prevalent emotional distress, anxiety, and fear among investors evoked by the destructive and deadly forces of the storm. These negative emotions presumably are stronger when faced with stronger storms and may be managed with better preparedness. This is indeed the case given that we find evidence of more significant market reaction to moderate and severe typhoons and in the early years than in recent years.

Keywords: Market reaction; tropical cyclone; behavior finance (search for similar items in EconPapers)
JEL-codes: G14 G41 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:wsi:ccexxx:v:14:y:2023:i:02:n:s2010007823500069

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DOI: 10.1142/S2010007823500069

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