Do announcements of WTO dispute resolution cases matter? Evidence from the rare earth elements market

Juliane Proelss, Denis Schweizer and Volker Seiler
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Juliane Proelss: John Molson School of Business - Concordia University [Montreal]
Denis Schweizer: John Molson School of Business - Concordia University [Montreal]

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Abstract: Rare earth elements (REEs) have gained increasing attention recently for several key reasons: 1) they are vital to many strategic industries, 2) they are relatively scarce, 3) they frequently exhibit high price fluctuations, 4) China holds a quasi-monopoly on their mining, and 5) China's REE policy, which was overly restrictive and led to a formal complaint from the U.S., Japan, and the EU at the World Trade Organization (WTO) in 2012. This paper investigates whether the announcement of a WTO dispute resolution case has the power to fundamentally change market dynamics. We find empirical support for this notion because REE prices exhibit a structural break around the announcement of the WTO dispute, and show lower variance ratios for all tested REEs afterward. This indicates a tendency toward efficiency, although REE prices still do not follow a random walk. Similarly, we find that stock price informativeness of companies in the REE industry increases after the announcement, reflecting more firm-specific than marketwide information and less governmental influence. Finally, we show that model uncertainty for option pricing models decreases, which we measure by the lower pricing differences among them.

Keywords: Market efficiency; Rare earth elements; Stock price informativeness; Structural break test; Variance ratio test; World Trade Organization (WTO) (search for similar items in EconPapers)
Date: 2018-06
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Citations: View citations in EconPapers (14)

Published in Energy Economics, 2018, 73, pp.1-23. ⟨10.1016/j.eneco.2018.05.004⟩

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Journal Article: Do announcements of WTO dispute resolution cases matter? Evidence from the rare earth elements market (2018)
Working Paper: Do Announcements of WTO Dispute Resolution Cases Matter? Evidence from the Rare Earth Elements Market (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-02983217

DOI: 10.1016/j.eneco.2018.05.004

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