Nuclear Hazard and Asset Prices: Implications of Nuclear Disasters in the Cross-Sectional Behavior of Stock Returns

Ana Belén Alonso-Conde,Javier Rojo-Suárez

doi:10.3390/su12229721

Ana Belén Alonso-Conde, Javier Rojo-Suárez

Open Access

https://doi.org/10.3390/su12229721

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Journal: Sustainability	Publication Date: Nov 21, 2020
Citations: 2	License type: CC BY 4.0

Affiliation: King Juan Carlos University

Abstract

Using stock return data for the Japanese equity market, for the period from July 1983 to June 2018, we analyze the effect of major nuclear disasters worldwide on Japanese discount rates. For that purpose, we compare the performance of the capital asset pricing model (CAPM) conditional on the event of nuclear disasters with that of the classic CAPM and the Fama–French three- and five-factor models. In order to control for nuclear disasters, we use an instrument that allows us to parameterize the linear stochastic discount factor of the conditional CAPM and transform the classic CAPM into a three-factor model. In this regard, the use of nuclear disasters as an explanatory variable for the cross-sectional behavior of stock returns is a novel contribution of this research. Our results suggest that nuclear disasters account for a large fraction of the variation of stock returns, allowing the CAPM to perform similarly to the Fama–French three- and five-factor models. Furthermore, our results show that, in general, nuclear disasters are positively related to the expected returns of a large number of assets under study. Our results have important implications for the task of estimating the cost of equity and constitute a step forward in understanding the relationship between equity risk premiums and nuclear disasters.

Highlights

In the last decades, numerous studies have been conducted on environmental protection in a holistic context, with increasing analysis of its implications for the economy and financial markets
The fact that a large number of variables used by disaster models are difficult to measure hinders their use in practical applications. To overcome these limitations and analyze the effect of nuclear disasters on discount rates from a practical perspective, in this paper, we study the performance of the capital asset pricing model [10,11,12] when we control the coefficients of the model for the occurrence of nuclear catastrophes
Our results show that the conditional capital asset pricing model (CAPM) performs very satisfactorily in pricing different sets of portfolios that are typically mispriced by the classic CAPM, 25 size-book-to-market equity portfolios, 25 size-price-earnings ratio portfolios and 50 industry portfolios

Summary

Introduction

Numerous studies have been conducted on environmental protection in a holistic context, with increasing analysis of its implications for the economy and financial markets. The fact that a large number of variables used by disaster models are difficult to measure hinders their use in practical applications To overcome these limitations and analyze the effect of nuclear disasters on discount rates from a practical perspective, in this paper, we study the performance of the capital asset pricing model (hereafter, CAPM) [10,11,12] when we control the coefficients of the model for the occurrence of nuclear catastrophes. Our results show that the CAPM conditional on the event of nuclear disasters performs very to the Fama–French three- and five-factor models in the Japanese stock market This fact suggests that nuclear disasters behave as a state variable of special hedging concern for investors, in the language of the intertemporal-asset pricing model (ICAPM) [22].

Theoretical Background

Models

Results and Discussion