Guy Kaplanski and Kaim Levy studied the effect of large-scale aviation disasters over 57 years on stock prices. Their goal was to study the relationship between anxiety producing events and negative investment sentiment and the results are quite interesting:
Behavioral economic studies reveal that negative sentiment driven by bad mood and anxiety affects investment decisions and may hence affect asset pricing. In this study we examine the effect of aviation disasters on stock prices. We find evidence of a significant negative event effect with a market average loss of more than $60 billion per aviation disaster, whereas the estimated actual loss is no more than $1 billion. In two days a price reversal occurs. We find the effect to be greater in small and riskier stocks and in firms belonging to less stable industries. This event effect is also accompanied by an increase in the perceived risk: implied volatility increases after aviation disasters without an increase in actual volatility.
Read the study here. This site discusses the results in more detail.
The summary conclusion from all my research is that chaos and stress affect how investors react–no doubt about it. The debate really revolves around the reaction response: Do traders overreact to disaster events? Or do they underreact? Perhaps investors underreact initially, and then correct their actions afterward? There are any number of combinations one might expect.
This paper specifically tests to see if people overreact to disaster events. What the authors find, in the context of airline disasters, is that traders punish stocks beyond fundamentals. Interestingly, the evidence also suggest that within a few days stock prices rebound to their appropriate levels.
Efficient markets? I think not.
Talk to Frank about this study
Related posts:
to follow a category