Stock Prices in Insurance Industry After Hurricane Katrina
Effect of hurricane katrina on insurance industry stock prices
Abstract
This study tests the efficient market theory by measuring the effects of Hurricane Katrina, one of the most deadly and destructive natural disasters to occur in the United States, on stock prices in insurance industry. It hypothesizes that insurance providers who offer services in the areas affected by Hurricane Katrina should incur a loss in the market-price of their stock following the natural disaster. This event study analyzed fifteen publicly-traded major insurance providers and the risk-adjusted rate of return on their stock before and after the date of dissipation of the hurricane, observed as August 30th, 2005. Results show stock returns, although dropping slightly after Hurricane Katrina, not having any measurable negative effect as a result of the storm. These results support the efficient market theory, as the insurance industry did not have any adverse effect from the devastation of Hurricane Katrina, allowing for no opportunity for abnormal return or avoidance of a loss. Appropriate statistical tests for significance conducted in this study show that Hurricane Katrina had no significant impact on the risk adjusted rate of return on selected insurance industry stock prices over the event study period.
INTRODUCTION AND BACKGROUND
Natural disasters have an opportunity to affect the stock market, but how soon subsequently to such events does the market react? Is it possible to avoid a capital loss by selling an insurance industry stock prior to such an event? The purpose of this event study is to test the market efficiency theory by analyzing the impact of a specific natural disaster from the time leading up to the event and then ultimately thereafter on the stock prices of insurance companies. How fast does the market price of the firms’ stock react to the natural disaster examined? This study will test the Insurance Industry’s reaction to Hurricane Katrina, the
Abstract
This study tests the efficient market theory by measuring the effects of Hurricane Katrina, one of the most deadly and destructive natural disasters to occur in the United States, on stock prices in insurance industry. It hypothesizes that insurance providers who offer services in the areas affected by Hurricane Katrina should incur a loss in the market-price of their stock following the natural disaster. This event study analyzed fifteen publicly-traded major insurance providers and the risk-adjusted rate of return on their stock before and after the date of dissipation of the hurricane, observed as August 30th, 2005. Results show stock returns, although dropping slightly after Hurricane Katrina, not having any measurable negative effect as a result of the storm. These results support the efficient market theory, as the insurance industry did not have any adverse effect from the devastation of Hurricane Katrina, allowing for no opportunity for abnormal return or avoidance of a loss. Appropriate statistical tests for significance conducted in this study show that Hurricane Katrina had no significant impact on the risk adjusted rate of return on selected insurance industry stock prices over the event study period.
INTRODUCTION AND BACKGROUND
Natural disasters have an opportunity to affect the stock market, but how soon subsequently to such events does the market react? Is it possible to avoid a capital loss by selling an insurance industry stock prior to such an event? The purpose of this event study is to test the market efficiency theory by analyzing the impact of a specific natural disaster from the time leading up to the event and then ultimately thereafter on the stock prices of insurance companies. How fast does the market price of the firms’ stock react to the natural disaster examined? This study will test the Insurance Industry’s reaction to Hurricane Katrina, the
Cited: Hyle, Robert Regis. "The Post-Katrina World." Techdecisions 7.11 (2005): 8. Business Source Complete. Web. 21 Nov. 2012. Ryst, Sonja. "S&P 's Hurricane Post-Mortem." Businessweek Online (2005): N.PAG. Business Source Complete. Web. 25 Nov. 2012. King, Rawle O. Hurricane Katrina Insurance Losses and National Capacities for Financing Disaster Risk. Washington, D.C.: Congressional Research Service, Library of Congress, 2005. Print. Towers Perrin. Office of the Managing Director. Hurricane Katrina: Analysis of the Impact on the Insurance Industry. N.p.: Towers Perrin, 2005. Print. *All historic stock prices data gathered from https://finance.yahoo.com