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Flight to Gold: Extreme Weather Events and Stock Returns

Last Updated on 10 February, 2024 by Rejaul Karim

The study “Flight to Gold: Extreme Weather Events and Stock Returns” provides a comprehensive examination of the impact of North Atlantic hurricanes on U.S. stock returns from January 1990 to December 2014.

Employing an event study approach at the stock level, the research uncovers a substantial and lasting economic impact of hurricanes on the aggregate market, resulting in accrued losses of 0.522% (equivalent to 6.264% annualized) up to 30 days post-landfall.

However, amid these meteorological disruptions, a unique trend emerges in the behavior of Gold-related stocks. While many sectors experience consistent negative abnormal returns, Gold-related stocks display substantial positive abnormal returns, indicating their function as a safe asset during market disruptions caused by extreme weather events.

Furthermore, the study explores the degradation in liquidity of Gold stocks, shedding light on their resilience compared to other industries and ruling out a mere flight to liquidity.

Abstract Of Paper

Using an event study approach at the stock level, we examine the effect of North Atlantic hurricanes on U.S. stock returns over the period January 1990 to December 2014. We document a substantial economic impact of hurricanes on the aggregate market: an accumulated loss of 0.522% (6.264% annualized) to 30 days post-landfall. For Industry Portfolios encompassing the entire U.S. stock market, we document several patterns. Many manufacturing-based and consumer-focused Industry Portfolios exhibit consistently negative abnormal returns over the event window from formation of the hurricane to 30 days post-landfall. Although the market tends to incorporate the foreseen loss related to the hurricane before landfall, there is no recovery post-landfall and the losses continue to accumulate. One industry in particular reacts differently, namely Gold. Gold-related stocks experience substantial positive abnormal returns during these extreme weather events, which suggests that this commodity acts as an endogenous safe asset during the market disruption caused by such meteorological phenomenon. We also show that degradation in liquidity of Gold stocks’ is of the same magnitude as other industries which fairly rule out a flight to liquidity.

Original paper – Download PDF

Here you can download the PDF and original paper of Flight to Gold: Extreme Weather Events and Stock Returns.

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Author

Matthew Lanfear
EDHEC Business School

Abraham Lioui
EDHEC Business School

Mark Siebert
EDHEC Business School

Conclusion

In conclusion, the research on “Flight to Gold: Extreme Weather Events and Stock Returns” provides compelling insights into the impact of North Atlantic hurricanes on U.S. stock returns.

The study unveils a significant economic impact of hurricanes on the aggregate market, leading to accrued losses in various sector portfolios. Notably, while numerous industries experience consistent negative abnormal returns during these extreme weather events, Gold-related stocks exhibit substantial positive abnormal returns, underlining their role as a safe asset amid market disruptions caused by such meteorological phenomena.

Furthermore, the study highlights the comparable degradation in liquidity of Gold stocks in comparison to other industries, effectively ruling out a mere flight to liquidity and emphasizing the unique safe-haven characteristics of gold during extreme weather events.

This research sheds light on the dynamic behavior of stock returns in the face of natural disasters and underscores the significance of gold as a resilient asset in times of market turmoil.

Related Reading:

Investing in Gold – Market Timing or Buy-and-Hold?

Political Uncertainty and Commodity Markets

FAQ

Q1: What is the main focus of the research paper “Flight to Gold: Extreme Weather Events and Stock Returns”?

A1: The main focus of the research paper is to examine the impact of North Atlantic hurricanes on U.S. stock returns over the period from January 1990 to December 2014. The study employs an event study approach at the stock level to analyze the economic impact of hurricanes on the aggregate market and explores the behavior of different industry portfolios during extreme weather events.

Q2: What is the key finding regarding the impact of hurricanes on the U.S. stock market?

A2: The research paper finds a substantial and lasting economic impact of North Atlantic hurricanes on the U.S. stock market. It documents an accumulated loss of 0.522% (equivalent to 6.264% annualized) up to 30 days post-landfall. The study observes that while the market tends to incorporate the foreseen loss related to the hurricane before landfall, there is no recovery post-landfall, and the losses continue to accumulate.

Q3: How do Gold-related stocks behave during extreme weather events, particularly hurricanes?

A3: Gold-related stocks exhibit substantial positive abnormal returns during North Atlantic hurricanes. While many manufacturing-based and consumer-focused industry portfolios experience consistently negative abnormal returns, Gold-related stocks stand out by displaying positive abnormal returns. This suggests that gold serves as an endogenous safe asset during market disruptions caused by extreme weather events.

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