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

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.