Corporate Catastrophes, Stock Returns, and Trading Volume

Abstract

This paper extends the literature to a redefinition of catastrophes, takes it international, and attempts to model the impact on stock price, stock price volatility, and trading volume. The preliminary findings indicate that the impact of catastrophes on stock returns is not strongly influenced by the existence of catastrophe insurance. Catastrophes appear to affect returns in rather complex ways which seem to result in a re-evaluation of management — which may be positive or negative. This result is largely consistent with modern financial theory which suggests that stock valuation is based on ex ante risk assessments in the context of large portfolios. In such a setting, much of the idiosyncratic risk associated with a particular company is diversified away. Further hedging of risk by management may be redundant from the view of shareholders. This paper aims to identify the impact of catastrophes by focusing on 15 major corporate catastrophes and tracing their impact on stock returns and trading volume.