Abstract
In this study, we examine the effect of drought on industry stock prices using a balanced panel of monthly data for 15 industries classified by China Securities Regulatory Commission in 2012. By combining the results of ordinary least squares (OLS) estimation and quantile regression models, we present a comprehensive evaluation of the relationship between drought and industry stock prices. The OLS regression results generally show that drought is negatively correlated with industry stock prices. However, quantile regression reveals that the effect of drought changes from positive to negative from the lowest to the highest stock price quantile. In addition, drought resistance capacity varies by industry. We further use threshold regression to determine the effects of investor sentiment on the relationship between drought and stock prices and identify two different regimes: low sentiment and high sentiment. In the low sentiment regime, drought has a significant negative effect on industry stock prices, while in the high sentiment regime, drought has a significant positive impact on industry stock prices.
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