Effects of foreign disasters on the petroleum industry in Japan: A financial market perspective

Energy 35 (2010) 5455e5463

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Effects of foreign disasters on the petroleum industry in Japan: A financial market perspective Kunihiro Hanabusa* Faculty of Commerce, Doshisha University, Kamigyo-ku, Kyoto 602-8580, Japan

a r t i c l e i n f o

a b s t r a c t

Article history: Received 9 December 2009 Received in revised form 21 June 2010 Accepted 24 June 2010 Available online 21 August 2010

In this paper, we examine how certain foreign disastersdthe September 11 terrorist attacks, Iraq War, and Hurricane Katrinadaffected the stock prices of the Japanese petroleum industry. Using the market model with and without heteroskedasticity, we analyze and estimate the extent to which these disasters impacted the stock prices from two perspectives: (1) the influence of these disastrous incidents on the entire petroleum industry and (2) the effect on individual firms. The empirical results reveal that an increase in the stock prices of individual firms caused an increase in the stock prices of the entire Japanese petroleum industry after the September 11 terrorist attacks. However, the Iraq War and Hurricane Katrina had both negative and positive influences on the expected profits of individual firms and did not have a significant effect on the stock prices of the Japanese petroleum industry. Ó 2010 Elsevier Ltd. All rights reserved.

Keywords: Event study Stock prices GARCH

1. Introduction Japan is heavily dependent on oil imports, and such imports are used for domestic oil consumption. Therefore, changes in oil prices are a serious obstacle to economic activity in the country. For example, during the oil shocks of the 1970s and early 1980s, the increase in oil prices affected economic activity in Japan through the channels of supply and demand. An increase in oil prices affects the price of raw materials, increases the cost of firms, and decreases the real income of households. There are numerous studies on the relationship between oil prices and economic activity in Japan [1e5]. Darby [1], Burbidge and Harrison [2], Rebeca and Sanchez [3], Cunado and Gracia [4], and Hanabusa [5] focus on the level (mean) relationship between oil prices and economic activity. Moreover, Hanabusa also investigates the influence of oil price variance. It is evident from these previous literatures that oil prices play an informational role in the domestic economy. Therefore, the government and central bank must pay close attention to oil prices in order to subvert any recessionary tendencies and avoid instability in price level. In the event of changes in oil prices, the authorities must attempt to implement appropriate fiscal and monetary policies. In this study, we consider the influence of an increase in oil prices on the Japanese economy from a different perspective than that adopted in previous studies. We analyze the impact of

* Tel.: þ81 (0)75 251 4512; fax: þ81 (0)75 251 3061. . E-mail address: [email protected]. 0360-5442/$ e see front matter Ó 2010 Elsevier Ltd. All rights reserved. doi:10.1016/j.energy.2010.06.036

foreign events on the stock prices of the Japanese petroleum industry. Numerous previous studies examine how the rise in oil prices affects production and prices; moreover, these papers tend to focus mainly on the oil crisis of the 1970s and 1980s. However, we focus on three disastrous incidents that led to changes in oil pricesdthe September 11 terrorist attacks, Iraq War, and Hurricane Katrinadand examine their impacts on the stock prices of oil in Japan. The Iraq War is also referred to as “the 3rd Persian Gulf War” and “the 2003 invasion of Iraq.” The September 11 terrorist attacks and Iraq War were man-made disasters, whereas Hurricane Katrina was a natural calamity. Further, while the US was the target of the September 11 terrorist attacks and also suffered great losses from Hurricane Katrina, the Iraq War had direct effects on Iraq. These events adversely affected petroleum imports and exports among countries. Certain papers also investigate the relationship between changes in oil prices and financial markets [6e8]. Occurring over the period 2001e2005, the three abovementioned disasters caused large-scale devastation to the crude oil-producing countries. On the morning of September 11, 2001, two hijacked jet airplanes were flown into the twin World Trade Center towers in New York City. This catastrophic event went on to seriously affect the banking and financial institutions in the US. Drakos [9] investigates the extent of the impact of the September 11 terrorist attacks on a set of airline stocks by employing the market model, and indicates an increase in systematic risk. On the other hand, Lacker [10] reviews the Federal Reserve’s response and the extent of the impact of the attack on banking and financial institutions.

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The Iraq War began on March 19, 2003, initiated by a US invasion of Iraq (motivated by factors such as disarming Iraq of its purported weapons of mass destruction). This event caused havoc in the Middle Eastern economy. Certain studies provided empirical evidence that the Iraq War had a significant impact on global financial markets [11e13]. On August 29, 2005, Hurricane Katrina struck and tore through the Gulf Coast, flooding and causing destruction in New Orleans. On the financial front, the hurricane caused a rise in oil prices. Moreover, the hurricane destroyed houses and factories and damaged offshore oil and gas structures [14,15]. This paper aims to characterize the dynamics of the stock returns of 6 Japanese petroleum companies in response to the three abovementioned catastrophic events by using the event study, OLS (Ordinary Least Squares), and GARCH (Generalized Autoregressive Conditional Heteroskedasticity) approaches. The event study approach is employed in order to analyze the financial effects of the catastrophic events. MacKinlay [16] describes the characteristic of this methodology in detail and argues that the event study approach is adapted in order to examine the wealth effects of mergers and acquisitions and the price effects of financing decisions by firms. The use of this methodology is not appropriate for cases where it is difficult to identify the exact date of the event or when the event is partially anticipated. However, the event study is a useful methodology for analyzing the reaction of stock prices to a particular event. There are certain empirical studies that investigate the relationship between environmental and financial performances in Japan [17e19]. Takeda and Tomozawa [17,18] and Yamaguchi [19] analyze how stock prices react to announcements of environmental ratings using the event study method. Thus, we also employ the event study approach and examine the effects of the three catastrophic events on the stock prices of the Japanese petroleum industry. Furthermore, we focus on the financial performance of individual firms in the Japanese petroleum industry using the OLS and GARCH approaches. The difference in the use of the OLS and GARCH approaches is that when the stock price is characterized by heteroskedasticity, the reaction to the event is analyzed using the GARCH approach. Yamaguchi accounts for the heteroskedasticity and examines the relationship between firms’ stock prices and their environmental performance. Chiou and Lee [20] use the GARCH model and focus on the impact of the volatility of oil prices (oil spot and future) in the US. It is known that stock prices have the property of heteroskedasticity; thus, the model that considers this property in these literatures is employed. We take account of this characteristic of the data and investigate the relationship between stock prices and the three catastrophic events. Our contribution to existing literature through this paper is twofold. First, we conduct a thorough analysis of the return dynamics of Japanese petroleum companies in response to exogenous shocks. We examine the impact and analyze the effect of each of the three disasters. Second, we present the impact of each disaster on Japanese petroleum firms and the entire Japanese petroleum industry. We employ the market model with and without heteroskedasticity and attempt to verify the robustness of the empirical result. Then, we compare the results obtained from the three methodsdevent study, OLS, and GARCH dand discuss the influence of the disasters on the stock prices. The reason why we use these three methods is to investigate each effect caused by the disasters on the industry and individual firms. It is important to understand whether the stock prices of firms react to the same or different aspect of the disasters because if the authorities do not possess appropriate information and implement policies, the expected effect may not occur or may be indefinite. The remainder of this paper is organized in the following manner. Sections 2 and 3 describe the data and empirical

methodology, respectively. Section 4 presents a clarification of the issues for analysis. Section 5 presents and discusses the empirical results. Section 6 summarizes and concludes the paper. 2. Data Data on daily stock prices of 6 Japanese petroleum companies are used in the empirical investigation. The stocks of the following firms are included in our sample: AOC Holdings (AOC), COS (Cosmo Oil), SHO (Showa Shell Sekiyu), NIP (Nippon Oil), TON (Tonengeneral Sekiyu), and FUJ (Fuji Kosan). These firms are members of the PAJ (Petroleum Association of Japan). The PAJ was established in November 1955 and comprises certain refining companies and primary distributors in Japan. The objective of the PAJ is to deal with all matters regarding the refining and marketing of petroleum products. We select the stock prices listed in the first section of the Tokyo Stock Exchange; investors consider these stocks to be the stock prices of excellent companies. Further, data from the TOPIX (Tokyo Stock Price Index) are used as proxies for the market portfolio. The time range of the data for each disaster is as follows: from September 20, 2000 to September 4, 2002 (for the September 11 terrorist attacks); from March 28, 2002 to March 12, 2004 (for the Iraq War); and from September 3, 2004 to August 22, 2006 (for Hurricane Katrina). All data are obtained from Thomson Reuters Datastream. The return on security i (ri,t) is calculated in the following manner in order to guarantee stationarity:

rf ;t ¼ lnPf ;t  lnPf ;t1 ;

f ¼ i; m;

i ¼ 1; .; 6;

where Pf,t is the original stock price data series (petroleum companies and TOPIX) at time t. The data is presented in Figs. 1e6. Table 1 presents the codes and names of firms. 3. Methodology In this section, we present three methodologies to study the effect of the three disasters on stock prices of the Japanese petroleum industry using the market model. In the first subsection, we use the event study approach and investigate the Japanese petroleum industry’s response to each disaster using the stock prices of 6 firms. This implies that the results are obtained as an average for these firms. In the second and third subsections, we estimate the influence of the disasters on each Japanese petroleum firm by employing a dummy variable. These subsections focus on the effect of the three disasters on individual firms. In the second subsection, we estimate the effect of the disasters by using the model without heteroskedasticity; on the other hand, in the third subsection, we

Fig. 1. Stock price return (AOC Holdings). Source: Thomson Reuters Datastream.

K. Hanabusa / Energy 35 (2010) 5455e5463

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Fig. 2. Stock price return (Cosmo oil). Source: Thomson Reuters Datastream.

Fig. 4. Stock price return (Nippon Oil). Source: Thomson Reuters Datastream.

estimate the effect of the three disasters by using the model with heteroskedasticity. Generally, stock prices are prone to violent fluctuations. The return of stock prices follows a fat-tailed distribution and involves heteroskedasticity. Thus, we consider this characteristic of the data and use the GARCH model, which accounts for heteroskedasticity.

introduce and apply the event study methodology. We explain and estimate each reaction of the petroleum industry to the three disastrous incidents. The market model is represented in the following manner:

3.1. Event study We investigate the relationships between stock prices and the three disasters using the market model. Since stock price is a forward-looking variable, new information has an immediate effect on price. In the dividend discount model, the stock price is determined by the sum of discounted expected future dividends. If there is new information that increases or decreases the firm’s profits, the stock price is adjusted by decision-making on the part of the investors. Fama [21] describes the efficient market hypothesis and emphasizes that “a market in which prices always ‘fully reflect’ available information is called ‘efficient’” (weak-form, strong-form, and semi-strong form). Empirical researchers in the fields of finance and economics widely employ the market model given by Sharpe [22] for examining the impact of a particular event on stock prices or an economic shock. In this paper, first, we employ the event study method and analyze the market model. The event study is a standard technique for measuring the reaction of stock prices to an announcement, event, or economic shock. This approach assumes that the market is efficient. Thus, the occurrence of a disaster is likely to cause a change in stock prices as long as the event is unexpected by investors. This analysis is based on Campbell et al. [23]. Moreover, Ball and Brown [24] and Fama et al. [25] also

Fig. 3. Stock price return (Showa Shell Sekiyu). Source: Thomson Reuters Datastream.

ri;t ¼ ci;1 þ ui rm;t þ vi;t :

(1)

In the above equation, ri, t and rm, t represent the return on security i and the market portfolio at time t, respectively. vi,t denotes an uncorrelated error term with mean zero and constant variance s2v . We define a two-day event window represented by t0 and t1 ¼ þ1. The terms t0 and t1 ¼ þ1 can be defined as the day of and the day after the event, respectively. The day of the event is determined on the basis of the time difference between the location of the event and Japan. ci,1 and ui are unknown parameters. Accordingly, the days for the September 11 terrorist attacks, Iraq War, and Hurricane Katrina are September 12, 2001, March 20, 2003, and August 30, 2005, respectively. We select the estimation window at 241 transaction days (approximately one year) prior to the catastrophic events. The data about the days the Tokyo Stock Exchange Market is closed is not included. In order to investigate the extent of the impact of the disaster, it is necessary to evaluate the abnormal returns of each firm (ARi,t). ARi,t is given by the difference between the estimated and realized returns.


ui rm;t : ARi;t ¼ ri;t  d ci;1 þ c

(2)

d ui are estimated parameters. The cumulative abnormal ci;1 and c returns of each firm (CARi) is calculated using ARi,t.

Fig. 5. Stock price return (Tonengeneral Sekiyu). Source: Thomson Reuters Datastream.

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industry to each of the three catastrophic events. Here, we focus on and estimate the reaction of six firms to the three catastrophic events. The objective is to compare the reaction of the entire petroleum industry with that of individual firms in Japan. The model is described in the following manner:

ri;t ¼ ci;1 þ ui rm;t þ dj Dj;t þ vi;t ;

j ¼ 1; .; 3:

(5)

where

D1;t ¼

Fig. 6. Stock price return (Fuji Kosan). Source: Thomson Reuters Datastream.

D2;t ¼ CARi ðt0 ; t1 Þ ¼

t1 X

ARi;t :

t ¼ t0

In order to test the null hypothesis that the event does not affect returns, we employ the following J1 and J2 statistics.

J1 ¼

ACARðt0 ; t1 Þ

wNð0; 1Þ; 1=2

(3)

 NðL1  4Þ 1=2 RACARðt0 ; t1 ÞwNð0; 1Þ; L1  2

(4)

"P

N i¼1

 J2 ¼

2

b s i ðt0 ;t1 Þ

#

N2

where

ACARðt0 ; t1 Þ ¼

N 1X CARi ðt0 ; t1 Þ; N i¼1

RACARðt0 ; t1 Þ ¼

N 1X CARi ðt0 ; t1 Þ : N i ¼ 1 sbi ðt0 ; t1 Þ

D3;t ¼

8 > <

1 > :0

ðt ¼ 2001=9=12Þ ; ðt ¼ otherwiseÞ

8 > <

1 ðt ¼ 2003=3=20Þ ; > : 0 ðt ¼ otherwiseÞ 8 > <

1 ð2005=8=30Þ : > : 0 ðt ¼ otherwiseÞ

In the above equations, Dj,t is an event dummy that takes the value unity to represent the day of the catastrophic eventdD1,t (the September 11 terrorist attacks), D2,t (the Iraq War), and D3,t (Hurricane Katrina). Since stock prices react on the day following the news of the catastrophic events, the dummy variables are determined accordingly. We estimate unknown parameters (ci,1, ui , and dj) and test the significance of dj in order to examine the effect of the catastrophic events. The sample periods range from September 20, 2000 to September 4, 2002 for the September 11 terrorist attack; from March 28, 2002 to March 12, 2004 for the Iraq War; and from September 3, 2004 to August 22, 2006 for Hurricane Katrina.

3.3. GARCH approach

In the above equations, L1 denotes the length of the estimation window and N is the number of firms. Both J1 and J2 statistics approximately follow a standard normal distribution. The sample periods range from September 20, 2000 to September 13, 2001 for the September 11 terrorist attacks; from March 27, 2002 to March 24, 2003 for the Iraq War; and from September 3, 2004 to August 31, 2005 for Hurricane Katrina.

In this subsection, we estimate the market model using the GARCH approach. The GARCH model given by Bollerslev [26] is an extension of the Autoregressive Conditional Heteroskedasticity (ARCH) model, which is based on a principle discovered by Engle [27]. The GARCH model specifies that variance depends on past volatilities and past variances of the dependent variable (see Bollerslev et al. [28,29]). The model is specified in the following manner:

ri;t ¼ ci;1 þ ui rm;t þ dj Dj;t þ 3i;t ;

3.2. OLS approach In this subsection, we estimate the parameters of the market model using OLS regression. On the basis of the modeling in the above subsection, we focus on the reaction of the petroleum

3i;t ¼

qffiffiffiffiffiffiffi hi;t ui;t :

Equation (6) is the mean equation. Further, the variance equation in the GARCH (1, 1) model is specified in the following manner:

hi;t ¼ ci;2 þ ai;1 3i;t1 þ ai;2 hi;t1 ;

Table 1 Firm’s code and name. Code

Firm

1 2 3 4 5 6

AOC COS SHO NIP TON FUJ

(6)



(7)



3i;t jIt1 wN 0; hi;t : The error term (3i;t ) is assumed to have a conditional normal distribution with zero mean and conditional variance (hi,t). ui,t is an independent white noise process with mean zero and unit variance. It1 denotes the information set. In addition to ci,1, ui , and dj which are estimated using the OLS approach, ci,2, ai ; 1, and ai ; 2 are

K. Hanabusa / Energy 35 (2010) 5455e5463

also unknown parameters that are estimated using the GARCH approach. Then, we test the significance of dj. In the GARCH (1, 1) model, the persistence of variance is measured by the magnitude of bi ¼ ai;1 þ ai;2 . When the value of bi approaches unity, the persistence of volatility shock is high. Further, asymptotic standard errors for parameters that are robust to departures from normality are reported by using the consistent varianceecovariance estimator given by Bollerslev and Wooldridge [30]. The sample period used here is the same as that used for the OLS approach. 4. Clarification of issues As mentioned earlier, we examine the response of stock prices in the Japanese petroleum industry to the September 11 terrorist attacks, Iraq War, and Hurricane Katrina; the former are manmade disasters and the latter a natural one, all caused in oilrelated countries. Since Japan imports oil in large quantities, these events affected the price and consumption of oil in the Japanese domestic market. Usually, such events raise oil prices and lower oil consumption. In such a case, firms are not expected to benefit from the occurrence of such disasters. However, Cooper [31] provided estimates of the price elasticity of demand for crude oil in Japan from 1971 to 2000. Yamaguchi [32] estimated the energy elasticity of demand for petroleum in Japan from 1986 to 2004. These papers indicated that the absolute value of price elasticity for oil is less than one and that the demand for oil is inelastic. Therefore, firms may be able to make profits from the remarkable rise in oil prices. Thus, in this paper, we first investigate whether these catastrophic events caused an increase or decrease in the stock prices of the Japanese petroleum industry using the event study approach. Thereafter, we examine the reaction of the stock prices of individual firms in the Japanese petroleum industry to these catastrophic events using the OLS and GARCH approaches. We apply the market model to all the three approaches used to analyze the reaction of the stock prices. We use the event study approach to examine the reaction of the stock prices of the entire Japanese petroleum industry; on the other hand, we use the OLS and GARCH approaches to analyze the response of individual firms in the Japanese petroleum industry. Although the three disasters affected stock prices, their influence on individual firms may be different. We analyze the reaction of the stock prices of individual firms and compare the obtained results. Then, we discuss the difference in the reactions of the authorities to the disasters and firms by analyzing investment action and the effect on the Japanese economy. 5. Empirical results and discussion In this section, we provide the empirical results for the event study, OLS, and GARCH approaches described in the previous sections. In the first subsection, we introduce the empirical results for the event study and discuss the reactions of the Japanese petroleum industry to three disasters. In the second subsection, we

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introduce the empirical results for the OLS and GARCH approaches. Then, we compare these results with those of the event study and argue the responses of individual firms to the disasters. 5.1. Results pertaining to the entire petroleum industry The empirical result of the event study approach is discussed using equation (1). The result is reported in Table 2. The reactions to the three disasters are discussed using the significance of the estimated parameters for J1 and J2 statistics. In the case of date ¼ 0 (t0), it is indicated in Table 2 that J1 and J2 statistics are not statistically significant at the 5 percent level, except for J1 of the September 11 terrorist attacks. J1 and J2 statistics are positive and statistically significant at the 5 percent level after the occurrence of the September 11 terrorist attacks (t1 ¼ þ1). Drakos [9] explains the drop in stock prices in all stock markets in response to the September 11 terrorist attacks, and presents negative returns for airline stocks. Moreover, Drakos indicates that this result reflects the increase in the uncertainty surrounding the airline industry. Further, Eldor and Melnick [33] investigate the relationship between financial markets and terrorism (location, type of attack, type of target, number of casualties, and number of attacks per day). They argue that terrorism caused a reduction in the expected profits of firms and had a negative effect on the stock market. However, in the case of the Japanese petroleum industry, positive returns occurred during t0 and t1 ¼ þ1. The September 11 terrorist attacks greatly influenced the stock prices one day after the disaster rather than on the day of the disaster itself. The main reason for this is probably that investors were not able to anticipate the effect of the disaster and were therefore unable to take prompt and appropriate action on the day that it occurred. However, on the day after the disaster, investors responded positively with regard to their investments in petroleum companies. It is likely that they considered the rise in oil prices to reflect the increase in a firm’s expected profits. This is because they were aware of the fact that oil is not produced domestically in Japan although its domestic consumption is rather high. On the other hand, the Iraq War and Hurricane Katrina did not have a noticeable effect on the stock prices of the Japanese petroleum industry. This is different from the view held in previous researches [11e15]. The lack of a noticeable effect on stock prices was likely because these disasters were foreseen by investors. It is widely acknowledged that stock prices are not affected if there is prior knowledge of a possible occurrence of a disaster. Hence, stock prices may not respond to these incidents when they actually occur. Unlike the Iraq war and Hurricane Katrina, investors did not anticipate the terrorist attacks of September 11. From these results, we conclude that the three disasters did not decrease the stock prices of the Japanese petroleum industry. Further, we focus on the investment action and consider the difference between the effect of the September 11 terrorist attacks and that of the Iraq War and Hurricane Katrina. We calculate the mean and variance of the prevailing oil prices (regular gasoline and light oil) of one year prior to the occurrence of the disasters. This is

Table 2 Empirical results of event study. Date

0 1

SETA

IW

HK

ACAR

J1

RCAR

J2

ACAR

J1

RCAR

J2

ACAR

J1

RCAR

J2

0.039 0.054

2.520a 3.453b

0.803 1.360

1.958 3.316b

0.001 0.012

0.129 1.205

0.296 0.132

0.722 0.323

0.005 0.010

0.600 1.159

0.470 0.103

1.146 0.252

Note: SETA: September 11 terrorist attacks, IW: Iraq War, HK: Hurricane Katrina. a Shows that null hypothesis is rejected 5% significance level. b Shows that null hypothesis is rejected 1% significance level.

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done in order to analyze the investment action taken prior to the event. Data is obtained from the website of the Oil Information Center (http://oil-info.ieej.or.jp/index.html). The means of regular gasoline price (yen/liter) of the September 11 terrorist attacks, Iraq War, and Hurricane Katrina are 90.6, 89.2, and 101.2 and variances are 0.6, 2.0, 16.8, respectively. The means of light oil price (yen/liter) of the September 11 terrorist attacks, Iraq War, and Hurricane Katrina are 36.2, 35.5, and 47.0 and variances are 0.6, 2.2, and 22.0, respectively. From these values it is evident that in the period before the September 11 terrorist attacks, the mean is in the middle but the variance is the smallest. Investors expect that the firm can increase expected profit under lower risk. Since oil is an important commodity in Japan, an increase in its price does not cause an immediate decrease in its consumption. Thus, the September 11 terrorist attacks may have caused an increase in the stock prices. However, since we do not analyze each firm individually, we cannot conclude that low-risk causes an increase in the stock prices. Thus, the influence of the three disasters on each firm in the petroleum industry must be investigated in detail.

Table 4 Empirical results of OLS approach (Iraq War).

ci,1 P value

ui P value d2 P value Adjusted R2

r1,t

r2,t

r3,t

r4,t

r5,t

r6,t

0.000 0.825 0.350 0.002 0.038 0.000 0.022

0.000 0.768 0.676 0.000 0.010 0.000 0.176

0.000 0.914 0.524 0.000 0.046 0.000 0.184

0.000 0.871 0.703 0.000 0.012 0.000 0.190

0.000 0.606 0.381 0.000 0.021 0.000 0.104

0.000 0.759 1.122 0.000 0.008 0.027 0.129

Note: This table shows the result of Iraq War. We estimate the parameters using the NeweyeWest autocorrelation standard errors.

It is indicated in Subsection 5.1 that the September 11 terrorist attacks led to an increase in the stock prices of the petroleum industry but the Iraq War and Hurricane Katrina did not. Therefore, in this subsection, we focus on individual firms in the petroleum industry and investigate the responses of these firms to the three disasters in terms of stock prices. First, we examine the empirical result obtained using the OLS approach, and primarily consider equation (5). These results are reported in Tables 3e5. The responses to the three disasters are discussed using the significance of the estimated parameter for dj. First, Table 3 reveals that the September 11 terrorist attacks led to an increase in the stock prices of 5 firms in the petroleum industry. The stock prices of 67 percent of the firms are positive and statistically significant at the 5 percent level. Comparing this result with that of the event study approach, we consider that the increase in the stock prices of individual firms in the petroleum industry caused the overall stock prices of the industry to rise. Thus, this implies that investors expected that the profits of petroleum companies would rise after the September 11 terrorist attacks. Second, the result of the effect of the Iraq War is presented in Table 4. The stock prices of 50 percent of the firms increased and those of the remaining 50 percent decreased. These values are statistically significant at the 5 percent level. This result is not consistent with that of the event study approach. The event study analysis indicated that the Iraq War did not affect the stock prices of the petroleum industry. However, the Iraq War affected the stock prices of individual firms in this industry. These results imply that the influence of individual firms offsets the influence on the entire industry. Thus, investors expected that the profits of petroleum companies would either rise or fall after the Iraq War. We calculated the variance of

the stock price returns 30 days prior to the occurrence of the three disasters. The results revealed that the stock prices of firms with high variance tended to be negatively influenced. We consider that investors invested in low-risk companies after the outbreak of the Iraq War. Finally, in Table 5, we present the result of the effect of Hurricane Katrina on stock prices. Hurricane Katrina caused the stock prices of 17 percent of the firms to increase and those of 50 percent to decrease. These values are statistically significant at the 5 percent level. This result is not consistent with that found in the event study. The event study analysis indicated that Hurricane Katrina did not affect the stock prices of the petroleum industry. However, it did affect the stock prices of individual firms in this industry. This result is the same as that obtained for the Iraq War. We consider that the influence of individual firms offset the influence on the entire petroleum industry, and that investors expected the positive and negative profits of petroleum companies. In the case of Hurricane Katrina, an increase in stock prices was found for only one firm. It is likely that the merger of NIP (¼r4,t) and gas company in July 2005 increased the stock price of NIP, and investors expected further increase in the profits of NIP after Hurricane Katrina. Next, we examine the empirical result obtained from the GARCH approach. This approach is used in order to check the robustness of the empirical result of the OLS approach. As the first step, the ARCH-LM test is applied to the residuals in order to test for heteroskedasticity. This test is based on the regression of the squared residuals on the own lagged squared residuals. The test statistic has an asymptotically chi-square distribution with degrees of freedom equal to the number of the own lagged squared residuals. The null hypothesis of this test is that all the coefficients of the own lagged squared residuals are zerodthere is no ARCH effect. These results are reported in Tables 6e8. It is evident from Table 6 that the ARCH effect exists from r1,t to r6,t. The values of bi (the persistence of variance) are 0.930 for r1,t, 0.666 for r2,t, 0.982 for r3,t, 0.771 for r4,t, 0.808 for r5,t, and 0.786 for r6,t. In other words, the persistence to volatility shock is relatively high for each stock price return. In Table 7, the ARCH effect only exists in r1,t and r2,t. bi is 0.558 for r1,t and 0.314 for r2,t. The persistence to volatility shock is relatively low for these returns.

Table 3 Empirical results of OLS approach (September 11 terrorist attacks).

Table 5 Empirical results of OLS approach (Hurricane Katrina).

5.2. Results for individual firms

ci,1 P value

ui P value d1 P value adjusted R2

r1,t

r2,t

r3,t

r4,t

r5,t

r6,t

0.001 0.599 0.489 0.001 0.086 0.000 0.019

0.000 0.935 0.648 0.000 0.032 0.000 0.079

0.001 0.320 0.797 0.000 0.032 0.000 0.168

0.000 0.963 0.587 0.000 0.001 0.802 0.097

0.001 0.429 0.367 0.000 0.005 0.282 0.047

0.000 0.985 0.683 0.000 0.123 0.000 0.040

Note: This table shows the result of September 11 terrorist attacks. We estimate the parameters using the NeweyeWest autocorrelation standard errors.

ci,1 P value

ui P value d3 P value Adjusted R2

r1,t

r2,t

r3,t

r4,t

r5,t

r6,t

0.001 0.499 0.832 0.000 0.002 0.327 0.091

0.000 0.600 0.832 0.000 0.015 0.000 0.211

0.000 0.693 0.712 0.000 0.010 0.000 0.271

0.000 0.984 0.824 0.000 0.003 0.008 0.234

0.000 0.970 0.506 0.000 0.007 0.000 0.197

0.000 0.929 1.326 0.000 0.004 0.062 0.176

Note: This table shows the result of Hurricane Katrina. We estimate the parameters using the NeweyeWest autocorrelation standard errors.

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Table 6 Empirical results of GARCH approach (September 11 terrorist attacks).

ci,1

ui,1

d1 ci,2

ai,1 ai,2

Q (20) Q2 (20) ARCH (5)

r1,t

P value

r2,t

P value

r3,t

P value

r4,t

P value

r5,t

P value

r6,t

P value

0.000 0.433 0.083 0.000 0.116 0.814 14.249 8.213 113.996

0.800 0.001 0.000 0.122 0.029 0.000 0.818 0.990 0.000

0.001 0.631 0.031 0.000 0.195 0.471 18.890 30.915 66.002

0.611 0.000 0.000 0.020 0.025 0.005 0.529 0.056 0.000

0.001 0.725 0.028 0.000 0.070 0.912 9.861 12.490 37.813

0.621 0.000 0.000 0.289 0.014 0.000 0.971 0.898 0.000

0.001 0.607 0.002 0.000 0.180 0.591 25.447 15.040 17.500

0.622 0.000 0.653 0.022 0.012 0.000 0.185 0.774 0.004

0.001 0.390 0.004 0.000 0.142 0.666 20.012 10.522 23.016

0.483 0.000 0.388 0.030 0.023 0.000 0.457 0.958 0.000

0.000 0.904 0.137 0.001 0.601 0.185 29.006 8.436 96.173

0.867 0.000 0.000 0.000 0.014 0.071 0.088 0.989 0.000

This table shows the result of September 11 terrorist attacks. Q (g) is the Ljung-Box statistics with g lags for the standardized residuals. Q2 (g) is the Ljung-Box statistics with g lags for the standardized residual squares. ARCH (5) shows the ARCH-LM test with 5 lags for the own squared returns.

Table 7 Empirical results of GARCH approach (Iraq War).

ci,1

ui,1

d2 ci,2

ai,1 ai,2

Q (20) Q2 (20) ARCH (5)

r1,t

P value

r2,t

P value

r3,t

P value

r4,t

P value

r5,t

P value

r6,t

P value

0.001 0.363 0.073 0.000 0.201 0.357 18.401 7.150 42.898

0.395 0.000 0.094 0.005 0.023 0.089 0.561 0.996 0.000

0.001 0.668 0.010 0.000 0.134 0.180 17.298 14.679 16.657

0.506 0.000 0.000 0.032 0.039 0.542 0.634 0.794 0.005

e e e e e e e e 3.989

e e e e e e e e 0.551

e e e e e e e e 7.752

e e e e e e e e 0.170

e e e e e e e e 10.264

e e e e e e e e 0.068

e e e e e e e e 8.974

e e e e e e e e 0.110

This table shows the result of Iraq War. Q (g) is the Ljung-Box statistics with g lags for the standardized residuals. Q2 (g) is the Ljung-Box statistics with g lags for the standardized residual squares. ARCH (5) shows the ARCH-LM test with 5 lags for the own squared returns.

Table 8 indicates that the ARCH effect only exists in r1,t and r4,t. bi is 0.985 for r1,t, and 0.961 for r4,t; the persistence to volatility shock is high for these returns. When there is no ARCH effect, there is no heteroscedasticity in the data. In this case, we examine the extent of the impact using the results from the OLS approach. Since we clarify the heteroskedasticity of each stock price, in the second step, we argue the effects of the three disasters on the stock prices of the petroleum industry from mean equation (6) and variance equation (7). These results are reported in Tables 6e8. As done for the OLS approach, the reactions to the events are discussed in terms of the significance of dj. First, Table 6 indicates that the September 11 terrorist attacks led to a rise in the stock prices of 67 percent of the firms in the petroleum industry. These values are positive and statistically significant at the 5 percent level. This result is the same as that obtained using the OLS approach and is robust. Thus, the increase in

the stock prices of individual firms caused the rise in the overall industrial stock prices throughout the increase of the expected profits in the future. Second, Table 7 reports the effect of the Iraq War. Since the ARCH effect exists in r1,t and r2,t, the effect of the disasters must be examined using the GARCH approach. The Iraq War tended to cause a decrease in the stock prices of r1,t and r2,t. The value of r2,t is negative and statistically significant at the 5 percent level, whereas that of r1,t is not statistically significant at the 5 percent level. The sign of dj is the same as that of r1,t and r2,t in the OLS approach. Thus the conclusion of the OLS approach does not change due to this empirical result. Finally, Table 8 indicates the effect of Hurricane Katrina on the stock prices of the petroleum industry. Since the ARCH effect exists in r1,t and r4,t, we examine the effect of the disaster using the GARCH approach. These stock prices increased after Hurricane Katrina. The value of r4,t is statistically significant at the 5 percent level. However, r1,t is statistically

Table 8 Empirical results of GARCH approach (Hurricane Katrina).

ci,1

ui,1

d3 ci,2

ai,1 ai,2

Q (20) Q2 (20) ARCH (5)

r1,t

P value

r2,t

P value

r3,t

P value

r4,t

P value

r5,t

P value

r6,t

P value

0.001 0.851 0.001 0.000 0.024 0.961 9.563 19.591 25.109

0.260 0.000 0.501 0.264 0.107 0.000 0.975 0.484 0.000

e e e e e e e e 3.123

e e e e e e e e 0.681

e e e e e e e e 9.647

e e e e e e e e 0.086

0.000 0.792 0.003 0.000 0.043 0.918 14.329 16.805 47.980

0.705 0.000 0.002 0.334 0.175 0.000 0.813 0.666 0.000

e e e e e e e e 7.819

e e e e e e e e 0.167

e e e e e e e e 2.583

e e e e e e e e 0.764

This table shows the result of Hurricane Katrina. Q (g) is the Ljung-Box statistics with g lags for the standardized residuals. Q2 (g) is the Ljung-Box statistics with g lags for the standardized residual squares. ARCH (5) shows the ARCH-LM test with 5 lags for the own square.

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K. Hanabusa / Energy 35 (2010) 5455e5463

insignificant at the 5 percent level. This result is consistent with r1,t and r4,t in the OLS approach. The result of r1,t and r4,t is robust. The conclusion obtained from the GARCH approach is consistent with that of the OLS approach. Consequently, from our analysis of the stock prices with and without heteroskedasticity, we found that the September 11 terrorist attacks tended to lead to a rise in the stock prices of firms in the Japanese petroleum industry. The Iraq War and Hurricane Katrina caused both an increase and decrease in the stock prices of firms in the Japanese petroleum industry. Although it is generally believed that such incidents cause a decline in stock prices, the stock prices of certain firms were observed to rise in response to the three disasters. It may be inferred from these empirical results that investors anticipated the increase in the firm’s profits in the petroleum industry after the outbreak of the September 11 terrorist attacks. However, the Iraq War and Hurricane Katrina had both negative and positive influences on the firm’s expected profits. This implies that certain investors expected that the firm’s profits would fall due to the lack of oil supply, whereas certain investors expected a rise in the firm’s profits due to an increase in oil prices. These events caused uncertainty with regard to the future of the Japanese economy. Using financial variables pertaining to the US, Rigobon and Sack [11] measured the extent of the risk associated with the Iraq War. They indicated that the increase in risk associated with the Iraq War caused a decrease in the stock prices of the petroleum industry. Further, Fernandez [12] argued that the Iraq War impacted the volatility of the Japanese financial market. In order to avoid financial anxiety that may be caused by a disaster, the central bank must adopt an appropriate monetary policy. Chiou and Lee [20] and Askari and Krichene [34] argue the relationship between oil prices and monetary policy. Chiou and Lee discuss that the structural breaks in oil prices are related to the change in the direction of the monetary policy. Askari and Krichene indicate that the monetary policy affects oil prices; they suggest that a stable monetary policy and positive real interest is required for stability in the oil market. The Bank of Japan implemented an expansionary monetary policy and provided ample liquidity in order to stabilize financial markets in the period 2001e2006. This direction of the policy may have lowered the financial risk. However, as mentioned in the above literatures, the government and central bank must implement an appropriate policy in order to avoid an increase in financial market risks caused by changes in oil prices. 6. Summary and conclusions In this paper, we examined how natural and man-made disasters impacted the stock prices of the Japanese petroleum industry by using the market model. Hurricane Katrina was considered in the modeling of a natural disaster, and the September 11 terrorist attacks and Iraq War were considered in the modeling of manmade disasters. The country that was directly impacted by Hurricane Katrina and September 11 terrorist attacks was the US, and the region affected by the Iraq War was the Middle East. The US and Middle East are influential regions in terms of petroleum production and determination of oil prices. From our analysis of the petroleum industry using the event study approach, we found that the September 11 terrorist attacks had a positive impact on the stock prices. However, the Iraq War and Hurricane Katrina had no impact on the stock prices. On the other hand, the analysis of individual petroleum firms using the OLS and GARCH approaches revealed that the September 11 terrorist attacks mainly caused an increase in the stock prices of Japanese petroleum firms, whereas the Iraq War and Hurricane

Katrina led to both an increase and decrease in stock prices. The stock prices of 4 firms in the petroleum industry responded in a significantly positive manner to the September 11 terrorist attacks. However, using the OLS approach revealed that the stock prices of three firms responded to the Iraq war in a significantly positive or negative manner. When heteroskedasticity is taken into account, the stock prices of three firms responded in a significantly positive manner and those of two firms responded in a significantly negative manner. The OLS and GARCH approaches revealed that Hurricane Katrina significantly affected the stock prices of 4 firms. One firm experienced a positive effect and three firms did a negative effect. Therefore, we conclude from these empirical results that the outbreak of disaster in a foreign country affected the stock prices of individual firms in the Japanese petroleum industry through the action of investors. However, since the disaster has either a positive or negative influence on the stock prices of individual firms, the empirical result of individual firms was not always consistent with that of the entire Japanese petroleum industry.

Acknowledgements I would like to thank the editor and two anonymous referees for helpful comments and suggestions. I gratefully acknowledge the financial support of Grant-in-Aid for Young Scientific Research by the Japan Society for the Promotion of Science (Project number: 21830142). Needless to say, all remaining errors are mine.

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