Abstract
The purpose of this paper is to approach the way investors perceive the risk associated with unexpected environmental disasters. For that reason, we examine certain types of natural and technological disasters, also known as “na-tech”. Based on the existing relevant literature and historical sources, the most common types of such disasters are geophysical and industrial environmental disasters. After providing evidence of the historical evolution of the na-tech events and a brief description of the events included in the sample, we estimate the systematic risk of assets connected to these events. The goal is to capture possible abnormalities as well as to observe investors’ psychology of risk after the occurrence of an unexpected event. Finally, we examine whether macroeconomic factors may affect those abnormalities. The empirical findings indicate that the cases we examined did not cause significant cumulative abnormal returns. Moreover, some events caused an increase in systematic risk while surprisingly some others reduced risk, showing that investors tend to support a country and/or corporation due to their reputation.
Highlights
Among those studying or working in the financial sector there is a well-spread knowledge regarding the rational investors’ preferences
Another significant finding by Carter and Simkins (2004) is that the results indicated a rapid drop of stock prices which led to a shock of the USA capital markets
Our initial attempt was to estimate systematic risk during the estimation window which will afterwards be used for computing expected returns and abnormalities
Summary
Among those studying or working in the financial sector there is a well-spread knowledge regarding the rational investors’ preferences. Regardless of the business sector they invest in, investors’ main goal is to maximize their profits, being characterized as “risk averters” (Merton 1969; Benartzi and Thaler 1999; Campbell and Cochrane 1999; Aıt-Sahalia and Lo 2000; Jackwerth 2000; Rosenberg and Engle 2002; Brandt and Wang 2003; Gordon and Pascal 2004; Bliss and Panigirtzoglou 2004; Bollerslev et al 2011; Halkos et al 2017). Investors are usually assumed to be rational, so if we ignore the arbitrage case, they tend to choose more “safe” investments which will allow them to maximize their profits, or in other words minimize potential risk they receive by investing (Cohn et al 1975; Benartzi and Thaler 1995; Haigh and List 2005). Great attention has been drawn about the advantages of portfolio diversification (Bugár and Maurer 2002). Graham and Jennings (1987) mentioned the ability of transferring the risk of investment through hedging, while Bond and Thompson (1985) highlighted that the size of the optimal hedging ratio is one of the main determinants used by decision makers apart from cash position of the corporation
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