Hurricane's Influence on Stock Prices Not Always Negative

Written by Cory Chandler

FOR IMMEDIATE RELEASE
DATE: April 19, 2006
CONTACT: Cory Chandler, cory.chandler@ttu.edu
(806) 742-2136

HURRICANE’S INFLUENCE ON STOCK PRICES NOT ALWAYS NEGATIVE

Initial Media Coverage of Hurricanes Can Boost Stock Prices

LUBBOCK – While hurricanes can be detrimental to the stock prices of insurance companies, Texas Tech University and East Carolina University economists have demonstrated that market performance varies widely depending on media coverage given to the storm as its direction and wind speeds shift.

In some cases, stock prices actually get a boost as insurance companies get what amounts to free advertising during the hurricane’s early stages, when media coverage focuses on the importance of being insured.
The findings, published in the American Meteorological Society’s “Weather and Forecasting,” help determine what impact extended windstorms have on insurance firms and could prompt improved risk management strategies.

In finance, studies analyzing economic impact often focus on a relatively short period, such as the day the storm made landfall, said Brad Ewing, Rawls professor in operations management in the Rawls College of Business and member of Texas Tech’s Wind Science and Engineering Research Center.

Using data gathered from Hurricane Floyd, which pounded North Carolina in September 1999, the researchers compared daily news coverage to insurance stock prices during the storm’s 11-day span, or synoptic life cycle. The synoptic life cycle began when Floyd was classified as a tropical depression and lasted until the hurricane finally ended.

“We found, essentially, that there is a lot of value placed in the media,” Ewing said. “Markets valued the news and responded accordingly.”

Early news reports given to the tropical storm gave little indication of impending damage, the researchers found. During this time, insurers saw their stock prices increase.

However, when the storm quickly grew to a category 4 and began racing toward the U.S. coast, prices plummeted as news sources began warning of possible devastation. When the storm weakened before making landfall, prices adjusted upward accordingly.

These responses are generally in line with models of investor behavior, where information is acted on quickly and assimilated into daily price changes, they reported.

The study was conducted by Ewing; Scott Hein, Briscoe Chair of bank Management in the Texas Tech Rawls College of Business; and Jamie Brown Kruse,with the Natural Hazards Mitigation Research Center at East Carolina University.

CONTACT: Brad Ewing, Rawls professor in operations management, Rawls College of Business, Texas Tech University, (806) 742- 3939, or bradley.ewing@ttu.edu.