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ABSTRACT
This study tests market efficiency by investigating the effect on oil company stock prices caused by the landfall of Hurricane Katrina. We should expect that oil firms with significant investments interests in Katrina's path would have negative stock price returns in a certain time frame. Ten oil companies' stocks with significant interests in the Gulf of Mexico are analyzed to determine the effect of Hurricane Katrina on stock price's risk adjusted rates of return before and after event date of August 23, 2005. Results show that stock prices began to drop significantly before the hurricane made landfall, displaying the market's semi-strong form of efficiency. Statistical tests show that the information about the storm made significant impacts on the difference between the actual average rates of return of the sample stocks and the corresponding risk adjusted average expected returns. Results shows that oil company stock price returns started a downturn at least nine days before Hurricane Katrina made landfall.
Key Words: market efficiency, hurricane, event study
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INTRODUCTION
Natural disasters affect the stock market and have significant impacts. This study examined how fast the market responded to such a disaster. If the market can impound all the available information, then the stock markets may be a possible predictor of how much devastation the population can expect. This study examines the market's ability to obtain and analyze the information to predict the impact of Hurricane Katrina by analyzing the risk adjusted rate of return of the ten selected oil companies.
Hurricane Katrina was one of the worst disasters in US history causing an estimated 1,800 people to lose their lives and 125 billion dollars worth of damage. Katrina moved towards land as a category 5, but weakened to a category 3 when it made landfall through the Gulf, with winds peaking at 175 mph (Reid, 2020). As was expected, the aftermath was devastating for many, specifically the oil companies who had operations in the Gulf. Katrina had one of the largest impacts on the US economy that created a devastating loss of millions for many companies. The purpose of this study is to analyze the risk adjusted rate of return for the event period as defined as the 30 days before...