The Financial Impact of Natural Disasters: Assessing the Effect of Hurricanes & Tropical Storms On Stock Markets in the Caribbean

Abstract

This study uses the event study methodology, corrected for the impact of thin trading, to investigate the economic and financial impact of hurricanes and tropical storms on small island developing states. The study investigates the stock market impact of all hurricanes and tropical storms to make landfall in the Bahamas, the Eastern Caribbean and Jamaica over the period January 1 2001 to June 30 2015. The results indicate that major hurricanes that make landfall in Jamaica generate stock markets losses that can be ten times greater than the widely reported losses from damage to property and infrastructure. The implication is that failure to account for capital market losses significantly understates the economic and financial impact of natural disasters. The results reinforce the vulnerability of Jamaica to natural disasters and provide another dimension to the scale of the negative impacts of climate change on small island developing states. The findings also suggest that measures to mitigate the effects of natural disasters not only minimize loss of life, property and infrastructure, but may also serve to protect the value of pensions and other investments held in the stock market. Despite a number of highly destructive storms making landfall in the Bahamas and the Eastern Caribbean, the passage of these storms had no direct impact on the Bahamas Stock Exchange or the Eastern Caribbean Stock Exchange. Therefore, investors in these two markets did not suffer any losses that could be directly traced to the passage of hurricanes and tropical storms. However, this finding should be interpreted with caution as the absence of any stock market impact may be more reflective of the workings of those stock markets than the economic and financial significance of the impact of the storms.