the effect of the great east japan earthquake on the japanese chemical industry

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THE EFFECT OF THE GREAT EAST JAPAN EARTHQUAKE ON THE JAPANESE CHEMICAL INDUSTRY PANAGIOTIS PANAS

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Page 1: The effect of the Great East Japan Earthquake on the Japanese Chemical Industry

THE EFFECT OF THE GREAT EAST JAPAN EARTHQUAKE ON THEJAPANESE CHEMICAL INDUSTRY

PANAGIOTIS PANAS

Page 2: The effect of the Great East Japan Earthquake on the Japanese Chemical Industry

THE EVENT STUDY METHODOLOGY

• Popular in the field of accounting & finance as it is widely used in order to measure the

effect of a specific event on the value of a firm

• It is not only restricted to economic events, i.e. earnings announcements or M&A

• It has been also used extensively so as to measure the economic impact of other types of

events like a natural disaster

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Page 3: The effect of the Great East Japan Earthquake on the Japanese Chemical Industry

RELATED STUDIES

• Ferstl, et al. (2012)

• The effect of the Fuckusima nuclear disaster on the Japanese, French, German and the US

stock prices for the alternative energy and the nuclear utility sectors was investigated

• The study shown significant ARs over the one-week event window as well as for the next

four-week post event window for the Japanese firms while significant ARs were observed for

the German and French ones only within the event window

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Page 4: The effect of the Great East Japan Earthquake on the Japanese Chemical Industry

RELATED STUDIES

• Tao (2012)

• The impact of the 2011 Tohuku Earthquake on the Japanese stock market was examined

• The obtained results indicated negative effects on the market, statistically significant at 1%

level, only for the next four days after the event

• Fourteen typical stocks like automotive, electricity, transportation and others, ARs were

negative and statistically significant at 1% level for the next ten days

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Page 5: The effect of the Great East Japan Earthquake on the Japanese Chemical Industry

RELATED STUDIES

• Worthington & Valadkhani (2004)

• The effect of 42 different natural disasters on the Australian stock market over a twenty-year

period was examined

• The most significant outcome of this work was that shocks provoked by natural disasters do

have impact on market returns

• Ceteris paribus, the results pointed out that earthquakes, cyclones and bushfires have a major

impact on the Australian market returns in contrast with other events like floods and sever

storms

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Page 6: The effect of the Great East Japan Earthquake on the Japanese Chemical Industry

IN THIS STUDY…

• The impact of the so called “2011 Great East Japan Earthquake” (GEJE) on the Japanese Chemical

Industry (JCI) is examined

• GEJE occurred in the north-eastern part of the Japanese mainland at 14:46 JST on March 11 and it is the

largest earthquake recorded with a magnitude of 9.1

• The “location” of the earthquake is considered as a low risk region in terms of seismic intensity which

implies that such an extreme event was quite unexpected

• JCI is the 2nd largest industry in Japan and the 4th one globally in terms of shipments, amounting to 286

US billion dollars in 2009

• Due to the importance of JCI for the economy as a whole, it is of particular interest to investigate the

stock reaction of this sector to such an extreme seismic excitation

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Page 7: The effect of the Great East Japan Earthquake on the Japanese Chemical Industry

METHODOLOGY

• The event study methodology is employed in order to measure the abnormal returns

(ARs) in the JCI due to the “GEJE” in March 11, 2011

• Due to the fact that the earthquake occurred only 15 minutes before the closing of the

trading day, it is assumed that there is not enough time for the market to react and hence

the “event date” is taken as the next trading day which is Monday, March 14

• The event window for this study was decided to be from the date of the event, as there

is “no new information” before the occurrence of the earthquake, and the next twenty

trading days [0, 20] = [𝑇1, 𝑇2].

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Page 8: The effect of the Great East Japan Earthquake on the Japanese Chemical Industry

METHODOLOGY

• The normal returns for the securities were calculated over an estimation window of 150

trading days [−160,−11] which is within the range of 100 to 300 days

• Normal returns were obtained through the use of the market model due to its

advantages compared to the constant mean model as follows

• 𝑅𝑖𝑡= 𝛼

𝑖+ 𝛽

𝑖𝑅

𝑚𝑡+ 𝜀

𝑖𝑡

• where 𝑅𝑖𝑡, 𝑅

𝑚𝑡are the returns on stock 𝑖 and the market portfolio respectively, 𝑡 is the

period time of the estimation window, and 𝛼𝑖 , 𝛽𝑖are the OLS parameters of the model.

Regarding the market portfolio, both TOPIX and Nikkei 225 indices were used so as to

compare the similarity of the results

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Page 9: The effect of the Great East Japan Earthquake on the Japanese Chemical Industry

METHODOLOGY

• The abnormal returns can be measured and analysed over the event window by taking

the difference between the actual returns and the market model estimates as follows

where 𝜏 refers to event time [0, 20]

• 𝐴𝑅𝑖𝜏= 𝑅

𝑖𝜏– ( ො𝑎𝑖+ መ𝛽𝑖𝑅𝑚𝜏)

• The aggregation of the AR through the event window is needed so as to conclude overall

inferences for the event of the earthquake. Cumulative abnormal returns (CARs) are

given by the following equation where 𝑇1 ≤ 𝜏1 ≤ 𝜏2 ≤ 𝑇2

• 𝐶𝐴𝑅𝑖 𝜏1, 𝜏2 = σ𝜏=𝜏1𝜏2 𝐴𝑅𝑖𝜏

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Page 10: The effect of the Great East Japan Earthquake on the Japanese Chemical Industry

METHODOLOGY

• CARs are calculated for 𝜏1 = 𝑇1 = 0 and 𝜏2 = 𝑇2 = 20 for the chemical industry as well

as for each subsector within the industry. In order to test the null hypothesis “Ho: The

abnormal returns are zero” the following test statistics in equations (Mackinlay, 1997) and

2.5 (Patell, 1976) have to be constructed:

• 𝐽1 =𝐶𝐴𝑅 𝜏1,𝜏2

𝑣𝑎𝑟(𝐶𝐴𝑅 𝜏1,𝜏2 )~ 𝑁(0, 1)

• 𝐽2 =𝑁(𝐿1−4)

𝐿1−2𝑆𝐶𝐴𝑅𝑖 𝜏1, 𝜏2 ~ 𝑁(0, 1)

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Page 11: The effect of the Great East Japan Earthquake on the Japanese Chemical Industry

METHODOLOGY

• Where:

• 𝐶𝐴𝑅 𝜏1, 𝜏2 =1

𝑁σ𝑖=1𝑁 𝐶𝐴𝑅𝑖 𝜏1, 𝜏2

• 𝐴𝑅𝜏 =1

𝛮σ𝑖=1𝑁 𝐴𝑅𝑖𝜏

• 𝑣𝑎𝑟 𝐶𝐴𝑅 𝜏1, 𝜏2 = σ𝜏=𝜏1𝜏2 𝑣𝑎𝑟(𝐴𝑅𝜏)

• 𝑆𝐶𝐴𝑅𝑖 𝜏1, 𝜏2 =𝐶𝐴𝑅𝑖 𝜏1,𝜏2

𝑣𝑎𝑟(𝐶𝐴𝑅𝑖 𝜏1,𝜏2

• 𝑆𝐶𝐴𝑅𝑖 𝜏1, 𝜏2 =1

𝑁σ𝑖=1𝑁 𝑆𝐶𝐴𝑅𝑖 𝜏1, 𝜏2

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Page 12: The effect of the Great East Japan Earthquake on the Japanese Chemical Industry

METHODOLOGY

• The null hypothesis is defined as: the abnormal returns are equal to zero.

• The two sided hypothesis test for this study is formally given below where if the null

hypothesis is rejected in favour of the alternative (for different significance levels: 10%, 5%

and 1%) then the event does have impact on the stock returns

• 𝐻0: 𝐶𝐴𝑅 𝜏1, 𝜏2 = 0

• 𝐻1: 𝐶𝐴𝑅 𝜏1, 𝜏2 ≠ 0

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Page 13: The effect of the Great East Japan Earthquake on the Japanese Chemical Industry

DATA DESCRIPTION

• The Thomson Reuters Database was used so as to gain access to the financial data

needed for the sample construction

• The initial sample consists of 159 companies of the JCI which are divided into 4 different

chemical subsectors including agricultural, diversified, commodity and specialty chemicals

• The sample comprises in total 77571 observations as it consists of 159 companies times

the number of the trading days for each company

• Trading days ranging from 5/01/2010 to 30/12/2011

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Page 14: The effect of the Great East Japan Earthquake on the Japanese Chemical Industry

DATA DESCRIPTION

• Three variables were generated in total for each company which are the stock returns,

the market returns which are the Topix and Nikkei225 indices

• The returns were calculated in the same way for these variables using the “logarithmic

difference” as follows

• 𝑅𝑖𝑡= 𝑙𝑜𝑔 (𝑃

𝑖𝑡) – 𝑙𝑜𝑔 (𝑃

𝑖𝑡−1)

• where 𝑅𝑖𝑡is for example the stock return and 𝑃

𝑖𝑡is the closing price of the stock 𝑖 on

trading day 𝑡

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Page 15: The effect of the Great East Japan Earthquake on the Japanese Chemical Industry

DATA DESCRIPTION

• The next step is to correct for missing data as some of the companies in the sample are

not listed and therefore stock returns are not available

• Nine companies in total were dropped from the sample as they were identified without

returns

• The sample consists of 150 companies and 73200 observations

• The observations for the day of “05/01/2010” were dropped for every company “ticker”

as there was not a lag price for the calculation of the returns

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Page 16: The effect of the Great East Japan Earthquake on the Japanese Chemical Industry

DATA DESCRIPTION

• There are not problems with data availability or missing values as well as that the number

of the companies is very sufficient for the purposes of this study

• In terms of subsectors the sample includes 5 companies falling within the agricultural

chemicals, 63 in commodity chemicals as well as 22 and 60 companies in diversified and

specialty chemicals respectively

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Page 17: The effect of the Great East Japan Earthquake on the Japanese Chemical Industry

ANALYSIS OF RESULTS

• Table 1 presents the results obtained from analysing a portfolio of 150 chemical firms

• At first glance, it is obvious that ARs are negative for the first two days; negative (-6.92%) and

highly significant (1% level) ARs are observed at the day of the event (day 0) which is also the

case for the first day after the earthquake where ARs are less negative (-5.72%) but even

more significant

• Beyond these two days, JCI started to recover as it is illustrated in figure 8.1 where CAR is

positively sloping with test statistics 𝐽1

and 𝐽2

to suggest significance at 1% level up to day 7

and day 5 respectively. According to the results obtained, CARs stop to be statistically

significant after 11 and 7 days for 𝐽1

and 𝐽2respectively

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Page 18: The effect of the Great East Japan Earthquake on the Japanese Chemical Industry

ANALYSIS OF RESULTS

• Figure 1 indicates that after day 8, CAR is relatively stable compared to the previous

response as it would be expected but it becomes statistically insignificant

• After day 16 statistically significant ARs are observed suggesting probably the presence of

another event like the accident occurred in the Fuckusima nuclear plant on 5th of April

and the announcement of high levels of radiation and/or the strong aftershock on the 7th

of the same month

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Page 19: The effect of the Great East Japan Earthquake on the Japanese Chemical Industry

ANALYSIS OF RESULTS

• The CAR plots for each of the four subsectors of JCI are presented in figure 8.2 as well as in

figure 8.3 where a relative comparison is being made while all the results are reported in the

rest tables

• The same trends with JCI are observed in the CAR plots for all subsectors with Commodity

and Diversified Chemicals to be the most affected ones with statistically significant at 1% level

ARs for the first day after the earthquake, equal to -7.59% and -6.88% respectively

• All subsectors started to response positively in the second day after the event (day 2) but this

does not hold for the agricultural sector which experiences negative ARs (-1.21%) and starts

to recover a day after

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Page 20: The effect of the Great East Japan Earthquake on the Japanese Chemical Industry

ANALYSIS OF RESULTS

• Regarding the significance of the results, test statistics suggest similar trends like the JCI with

some minor differences among the subsectors. For example, CARs for the agricultural sector

are statistically significant for 5 days (at 1% for the first four days and at 5% for the fifth one)

while for Commodity chemicals significance lasts for 8 days (at 1% for the first 6 days and at

10% for the last 2 days)

• Similarly, statistical significance is observed for Specialty and Diversified chemicals for 6 and 7

days respectively. Generally, significance increases for the whole industry as well as for the

subsectors as we add up more and more companies

• It has to be mentioned that identical results are obtained when the Nikkei 225 index is used

in the market model instead of the Topix index for the calculation of the normal returns.

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Page 21: The effect of the Great East Japan Earthquake on the Japanese Chemical Industry

LIMITATIONS

• Overall, the outcome of this work is in an agreement with other studies from the

existing literature, being referred in the introduction, as it is confirmed that extreme

natural disasters do have impact on the stock market

• Although different industries have different reactions under an event, the response of the

chemical sector in terms of significant ARs and the persistence of the earthquake effect

on the “chemical” stocks is consistent with other sectors examined in previous studies

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Page 22: The effect of the Great East Japan Earthquake on the Japanese Chemical Industry

LIMITATIONS

• The most usual problem that arises in the application of the event study method is the so

called “clustering” which in this work is unavoidable

• The event windows for all stocks included in the analysis overlap in calendar time (total

clustering – same day of event for all firms) and hence the aggregation of AR is no longer

valid as the covariances across the stocks are not zero

• The latter results in violation of the test statistics which may overstate the significance of

the results, leading frequently to rejection of the null hypothesis while this might not be

the case

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Page 23: The effect of the Great East Japan Earthquake on the Japanese Chemical Industry

LIMITATIONS

• The most common way to deal with the issue of the total clustering is to analyse AR

without aggregation by testing the null hypothesis using unaggregated stock by stock data

through the use of a multivariate regression model including a dummy variable for the

date of the event

• In addition, one should consider other factors that may have an effect on the obtained

results like the Fuckusima nuclear blast, occurred just a day after the earthquake, which

could have a further impact generally on the stock market as well as in the chemical

industry

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Page 24: The effect of the Great East Japan Earthquake on the Japanese Chemical Industry

LIMITATIONS

• Events which are not related with the seismic action like the increased supply of money

by the Bank of Japan on the 15th of March or the extra liquidity offered by the Japanese

government through the repurchasing of bonds on 16th of March could affect the

outcome of this study

• A much shorter event window could be appropriate in order to “isolate” the effect of

the earthquake but this would be of one day duration

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Page 25: The effect of the Great East Japan Earthquake on the Japanese Chemical Industry

RESULTS

JCI - Plot of CAR for

earthquake from event

day 0 to event day 20

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Page 26: The effect of the Great East Japan Earthquake on the Japanese Chemical Industry

RESULTS

JCI Subsectors - Plots of

CAR for earthquake from

event day 0 to event day 20

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Page 27: The effect of the Great East Japan Earthquake on the Japanese Chemical Industry

RESULTS

Chemical Subsectors – CAR

Comparisons for earthquake

from event day 0 to event day 20

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Page 28: The effect of the Great East Japan Earthquake on the Japanese Chemical Industry

RESULTS

Table 1

Reaction to GEJE: Daily &

Cumulative Abnormal Returns

for JCI

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Page 29: The effect of the Great East Japan Earthquake on the Japanese Chemical Industry

RESULTS

Table 2

Daily & Cumulative Abnormal

Returns for Agricultural

Chemicals

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Page 30: The effect of the Great East Japan Earthquake on the Japanese Chemical Industry

RESULTS

Table 3

Daily & Cumulative Abnormal

Returns for Commodity

Chemicals

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Page 31: The effect of the Great East Japan Earthquake on the Japanese Chemical Industry

RESULTS

Table 4

Daily & Cumulative Abnormal

Returns for Diversified

Chemicals

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Page 32: The effect of the Great East Japan Earthquake on the Japanese Chemical Industry

RESULTS

Table 5

Daily & Cumulative Abnormal

Returns for Specialty Chemicals

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Page 33: The effect of the Great East Japan Earthquake on the Japanese Chemical Industry

REFERENCES

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REFERENCES

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REFERENCES

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