# Risk Perceptions on Hurricanes: Evidence from the U.S. Stock Market

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## Abstract

**:**

## 1. Introduction

## 2. Data and Sample

## 3. Methodological Background

- Identifying the event of interest and the timing of the event;
- Specifying a benchmark model for normal stock returns behavior; and
- Calculating and analyzing abnormal returns around the event date.

- Estimation window: It is the period between T
_{0}and T_{1}. This period comprises 150 trading days. In this period, the Market model is applied for estimating normal returns. - Event window: This period ranges from T
_{1}to T_{2}and t = 0 (the hurricane landfall) is situated in the middle of this period. This is composed of twenty-one trading days: ten before the event date and ten after the event date. - Post-event window: which comprises the period from T
_{2}to T_{3}. This period will be used to prove and check if the daily returns of the companies selected go back to the previous situation before the hurricane.

_{0}and T

_{1}and is composed of 150 trading days. This period, usually designed as benchmark, is necessary to study the normal behavior of the stock prices before the event date.

_{it}is the return of the stock i on Day “t”; R

_{mt}is the return of the market portfolio on Day “t”; α

_{i}is the constant term; β

_{i}is a measure of the sensitivity between R

_{it}with respect to R

_{mt}; and ${\mathsf{\epsilon}}_{\mathrm{it}}$ is the random disturbance term.

_{it}is the daily return P & C Company, and R

_{mt}is the daily return of the S & P 500. The parameters α and β are estimated by Ordinary Least Squares (OLS):

_{mt}is the daily market index (S & P 500) return. $\widehat{{\mathsf{\alpha}}_{\mathrm{i}}}$ and $\widehat{{\mathsf{\beta}}_{\mathrm{i}}}$ are OLS estimates of the regression coefficients. Since stocks returns can exhibit autorregressive conditional heteroscedasticity, we have computed the quasi-maximum likelihood covariances and standard errors as described in [24]. The model is estimated under the assumption that the errors are conditionally normally distributed.

_{0}reflects the observed proportion of positive returns for a given time window. This statistic is distributed as a normal law of variance 1 and mean 0.

## 4. Research Design

_{it}) is by subtracting the current return minus the expected return (see Equation (1)). Then, to compute the global sample, we create a matrix, AR, composed of the abnormal returns of the P & C Insurance Companies for the event window E (−10, +10). The informativeness of the analysis is greatly improved by averaging the information over the sampled firms so the unweighted cross-sectional average of abnormal returns is considered [17]. Thus, we compute the average abnormal return (see Equation (5)). Reaching this point, we conduct a normality test to check whether the sample follow a normal distribution or not. Anderson–Darling (A-D) or Kolmogorov–Smirnov (K-S) tests can be suitable for such analysis. According to Engmann [27] the A-D test requires less data than the Kolmogorov Smirnov test to reach sufficient statistical power. They state that the A-D test is more sensitive to the tails of distributions and it is more reliable than the K-S. Consequently, we have conducted the Anderson–Darling test on the average abnormal return (AAR) of our event window.

## 5. Findings and Results

## 6. Conclusions

## Acknowledgments

## Author Contributions

## Conflicts of Interest

## References

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Name | Event Date * | Category (By Saffir-Simpson Hurricane Wind Scale (SSHWS)) | Damage (in USD) |
---|---|---|---|

Katrina | 23–31 August 2005 | 5 | 148 Billion |

Rita | 18–26 September 2005 | 5 | 12.037 Billion |

Felix | 31 August–5 September 2007 | 5 | 850 Million |

Ike | 1–14 September 2008 | 4 | 29.5 Billion |

Igor | 8–23 September 2010 | 4 | 25 Billion |

Ophelia | 20 September–3 Octorber 2011 | 4 | 21 Billion |

Sandy | 22–29 Octorber 2012 | 3 | 71 Billion |

Ticker | Company | Total Revenues * (in USD) |
---|---|---|

MMC | Marsh & McLennan Companies | 12,261 Billion |

PGR | Progressive Corporation | 18,170 Billion |

ACE | Ace Limited | 19,261 Million |

ALL | The Allstate Corporation | 34,507 Million |

CB | The Chubb Corporation | 13,502 Million |

TRV | Travelers | 26,191 Million |

BRK-B | Berkshire Hathaway’s | 182,150 Million |

Category | Wind Speed | Characteristics |
---|---|---|

1 | 119–153 km/h | Very dangerous winds. Extensive damage to power lines and poles. Large branches of trees will snap and shallowly rooted trees may be toppled. |

2 | 154–177 km/h | Extremely dangerous winds. Well-constructed frame houses could suffer damages in roof and siding damages. |

3 (major) | 178–208 km/h | Devastating damage will occur. No water or electricity services available. Houses will suffer damage or removal of roof docking and gable ends. Trees will be uprooted. |

4 (major) | 209–251 km/h | Catastrophic events will occur. Damages on roof structures and some exterior walls. Trees and power poles downs. Power outages for weeks to months. The area will be uninhabitable for weeks or months. |

5 (major) | 252 km/h or more | Catastrophic damage will occur. High percentage of homes destroyed. Isolation of residential areas due to fallen trees and power poles. Area uninhabitable. |

Hurricane | Main Areas Affected |
---|---|

Katrina | New Orleans and Mississippi coast |

Rita | Texas, Louisiana and Florida Keys |

Felix | Netherlands Antilles and Nicaragua |

Ike | Caribbean, Texas and Louisiana |

Igor | Bermuda and Newfoundland |

Ophelia | Bermuda and Leward Island |

Sandy | Jamaica, Cuba and Bahamas |

Hurricane Katrina | |||||

Sample Size | 21 | ||||

Statistics | 0.41432 | ||||

Rank | 14 | ||||

Α | 0.2 | 0.1 | 0.05 | 0.02 | 0.01 |

Critical value | 1.3749 | 1.9286 | 2.5018 | 3.2892 | 3.9074 |

Reject | No | No | No | No | No |

Hurricane Rita | |||||

Sample Size | 21 | ||||

Statistics | 0.21532 | ||||

Rank | 16 | ||||

Α | 0.2 | 0.1 | 0.05 | 0.02 | 0.01 |

Critical value | 1.3749 | 1.9286 | 2.5018 | 3.2892 | 3.9074 |

Reject | No | No | No | No | No |

Hurricane Felix | |||||

Sample Size | 21 | ||||

Statistics | 0.52823 | ||||

Rank | 22 | ||||

Α | 0.2 | 0.1 | 0.05 | 0.02 | 0.01 |

Critical value | 1.3749 | 1.9286 | 2.5018 | 3.2892 | 3.9074 |

Reject | No | No | No | No | No |

Hurricane Ike | |||||

Sample Size | 21 | ||||

Statistics | 0.5101 | ||||

Rank | 19 | ||||

α | 0.2 | 0.1 | 0.05 | 0.02 | 0.01 |

Critical value | 1.3749 | 1.9286 | 2.5018 | 3.2892 | 3.9074 |

Reject | No | No | No | No | No |

Hurricane Igor | |||||

Sample Size | 21 | ||||

Statistics | 0.18979 | ||||

Rank | 5 | ||||

α | 0.2 | 0.1 | 0.05 | 0.02 | 0.01 |

Critical value | 1.3749 | 1.9286 | 2.5018 | 3.2892 | 3.9074 |

Reject | No | No | No | No | No |

Hurricane Ophelia | |||||

Sample Size | 21 | ||||

Statistics | 0.22014 | ||||

Rank | 6 | ||||

α | 0.2 | 0.1 | 0.05 | 0.02 | 0.01 |

Critical value | 1.3749 | 1.9286 | 2.5018 | 3.2892 | 3.9074 |

Reject | No | No | No | No | No |

Hurricane Sandy | |||||

Sample Size | 21 | ||||

Statistics | 0.34723 | ||||

Rank | 15 | ||||

α | 0.2 | 0.1 | 0.05 | 0.02 | 0.01 |

Critical value | 1.3749 | 1.9286 | 2.5018 | 3.2892 | 3.9074 |

Reject | No | No | No | No | No |

Hurricane | N | Mean | StDev | St Error Mean | 95% CI for the Mean | t-Value | p-Value |
---|---|---|---|---|---|---|---|

Katrina | 21 | 0.002529 | 0.011378 | 0.002483 | (−0.002651; 0.007708) | 1.02 | 0.3207 |

Rita | 21 | 0.019033 | 0.012403 | 0.002707 | (0.013388; 0.024679) | 7.03 | <0.0001 * |

Felix | 21 | −0.027852 | 0.017014 | 0.003713 | (−0.035597; −0.020108) | −7.5 | <0.0001 * |

Ike | 21 | 0.034971 | 0.034986 | 0.007634 | (0.019046; 0.050897) | 4.58 | 0.0002 * |

Igor | 21 | 0.015657 | 0.015056 | 0.003285 | (0.008804; 0.022510) | 4.77 | 0.0001 * |

Ophelia | 21 | −0.02419 | 0.024902 | 0.005434 | (−0.035526; −0.012855) | −4.45 | 0.0002 * |

Sandy | 21 | 0.003562 | 0.018347 | 0.004004 | (−0.004790; 0.011913) | 0.89 | 0.3842 |

Hurricane | N | Median | 95% CI for the Median | Achieved Confidence | Position | p-Value |
---|---|---|---|---|---|---|

Katrina | 21 | 0.0009 | (−0.0027000; 0.0109000) | 92.16% | (7; 15) | 1 |

(−0.0027979; 0.0118795) | 95.00% | Interpolation | ||||

(−0.0030000; 0.0139000) | 97.34% | (6; 16) | ||||

Rita | 21 | 0.0239 | (0.0116000; 0.0262000) | 92.16% | (7; 15) | <0.0001 |

(0.0113388; 0.0262653) | 95.00% | Interpolation | ||||

(0.0108000; 0.0264000) | 97.34% | (6; 16) | ||||

Felix | 21 | −0.0341 | (−0.0400000; −0.0219000) | 92.16% | (7; 15) | <0.0001 |

(−0.0404571; −0.0180474) | 95.00% | Interpolation | ||||

(−0.0414000; −0.0101000) | 97.34% | (6; 16) | ||||

Ike | 21 | 0.0229 | (0.0182000; 0.0278000) | 92.16% | (7; 15) | <0.0001 |

(0.0174491; 0.0288448) | 95.00% | Interpolation | ||||

(0.0159000; 0.0310000) | 97.34% | (6; 16) | ||||

Igor | 21 | 0.0192 | (0.0089000; 0.0225000) | 92.16% | (7; 15) | 0.0072 |

(0.0083450; 0.0231203) | 95.00% | Interpolation | ||||

(0.0072000; 0.0244000) | 97.34% | (6; 16) | ||||

Ophelia | 21 | −0.0163 | (−0.0345000; −0.0111000) | 92.16% | (7; 15) | 0.0072 |

(−0.0346306; −0.0095655) | 95.00% | Interpolation | ||||

(−0.0349000; −0.0064000) | 97.34% | (6; 16) | ||||

Sandy | 21 | 0.0014 | (−0.0041000; 0.0142000) | 92.16% | (7; 15) | 1 |

(−0.0077240; 0.0143632) | 95.00% | Interpolation | ||||

(−0.0152000; 0.0147000) | 97.34% | (6; 16) |

Hurricane | N | Median | 95% CI for the Median | Achieved Confidence | Wilcoxon Statistic | p-Value |
---|---|---|---|---|---|---|

Katrina | 21 | 0.00355 | (−0.00275; 0.00750) | 94.84% | 142 | 0.3662 |

Rita | 21 | 0.01935 | (0.01415; 0.02560) | 94.84% | 227 | 0.0001 |

Felix | 21 | −0.0275 | (−0.03770; −0.02055) | 94.84% | 2.5 | <0.0001 |

Ike | 21 | 0.0249 | (0.0185; 0.0486) | 94.84% | 231 | <0.0001 |

Igor | 21 | 0.017 | (0.00820; 0.02335) | 94.84% | 214 | 0.0007 |

Ophelia | 21 | −0.0232 | (−0.03565; −0.01135) | 94.84% | 16 | 0.0006 |

Sandy | 21 | 0.0032 | (−0.0058; 0.0127) | 94.84% | 132.5 | 0.5663 |

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## Share and Cite

**MDPI and ACS Style**

Feria-Domínguez, J.M.; Paneque, P.; Gil-Hurtado, M.
Risk Perceptions on Hurricanes: Evidence from the U.S. Stock Market. *Int. J. Environ. Res. Public Health* **2017**, *14*, 600.
https://doi.org/10.3390/ijerph14060600

**AMA Style**

Feria-Domínguez JM, Paneque P, Gil-Hurtado M.
Risk Perceptions on Hurricanes: Evidence from the U.S. Stock Market. *International Journal of Environmental Research and Public Health*. 2017; 14(6):600.
https://doi.org/10.3390/ijerph14060600

**Chicago/Turabian Style**

Feria-Domínguez, José Manuel, Pilar Paneque, and María Gil-Hurtado.
2017. "Risk Perceptions on Hurricanes: Evidence from the U.S. Stock Market" *International Journal of Environmental Research and Public Health* 14, no. 6: 600.
https://doi.org/10.3390/ijerph14060600