Earthquakes in Chile-Peru and the price of copper

Tapia, Pablo and Pastén, Boris and Sepulveda Velasquez, Jorge (2022): Earthquakes in Chile-Peru and the price of copper.

Abstract

Chile and Peru produce 40% of the world’s copper. In parallel, they are both seismic countries, affecting copper stocks and therefore prices. Global warming will increase the demand for copper as well as the number of earthquakes, making it necessary to investigate the relationship between these phenomena. Our estimates show that earthquakes in Chile and Peru generate positive cumulative abnormal returns greater than 2%, but geographical earthquake coverage and the level of available copper inventory also play a role. In the event of an earthquake, actions are taken both in the financial market and in the physical copper market, which generates positive abnormal returns. The interaction between both can increase the short-term price volatility caused by the uncertainty of the effects of the earthquake. Investors can take actions to mitigate this volatility by controlling related news on days 1 and 2 of the event.

• Item Type: MPRA Paper
• Language: English
• Keywords: Copper, earthquakes, event studies
• Subjects: G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice ; Investment Decisions; G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates; G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q5 - Environmental Economics > Q54 - Climate ; Natural Disasters and Their Management ; Global Warming

References

Bandyopadhyay, A. and Rajib, P. (2021). The asymmetric relationship between baltic dry index and commodity spot prices: evidence from nonparametric causality-in-quantiles test. Mineral Economics, pages 1–21.

Berlemann, M. and Eurich, M. (2021). Natural hazard risk and life satisfaction–empirical evidence for hurricanes. Ecological Economics, 190:107194.

Bessler, W. and Wolff, D. (2015). Do commodities add value in multi-asset portfolios? an out-of-sample analysis for different investment strategies. Journal of Banking & Finance, 60:1–20.

Bieritz, L. and Mönnig, A. (2018). The fragility of the copper demand for the chilean economy.

Binder, J. J. (1985). On the use of the multivariate regression model in event studies. Journal of Accounting Research, pages 370–383.

Byrne, J. P., Fazio, G., and Fiess, N. (2013). Primary commodity prices: Co-movements, common factors and fundamentals. Journal of Development Economics, 101:16–26.

Cao, G., Xu, W., and Guo, Y. (2015). Effects of climatic events on the chinese stock market: applying event analysis. Natural Hazards, 77(3):1979–1992.

Carter, D. A. and Simkins, B. J. (2004). The market’s reaction to unexpected, catastrophic events: the case of airline stock returns and the september 11th attacks. The Quarterly Review of Economics and Finance, 44(4):539–558.

Daskalaki, C. and Skiadopoulos, G. (2011). Should investors include commodities in their portfolios after all? new evidence. Journal of Banking & Finance, 35(10):2606–2626.

Del Águila, P., Martínez, M., and Regalado, F. A. (2017). Cobre: Evolución reciente y potencial de desarrollo. Revista Moneda, (171):29–32.

Erb, C. B. and Harvey, C. R. (2006). The strategic and tactical value of commodity futures. Financial Analysts Journal, 62(2):69–97.

Fink, J. D., Fink, K. E., and Russell, A. (2010). When and how do tropical storms affect markets? the case of refined petroleum. Energy economics, 32(6):1283–1290.

Giesecke, A., Capera, A. G., Leschiutta, I., Migliorini, E., and Valverde, L. R. (2004). The ceresis earthquake catalogue and database of the andean region: Background, characteristics and examples of use. Annals of Geophysics, 47(2-3).

Guzmán, J. I. and Silva, E. (2018). Copper price determination: fundamentals versus non-fundamentals. Mineral Economics, 31(3):283–300.

Karafiath, I. (1988). Using dummy variables in the event methodology. Financial Review, 23(3):351–357.

Malatesta, P. H. (1986). Measuring abnormal performance: The event parameter approach using joint generalized least squares. Journal of Financial and Quantitative Analysis, 21(1):27–38.

Orbaneja, J. R. V., Iyer, S. R., and Simkins, B. J. (2018). Terrorism and oil markets: A cross-sectional evaluation. Finance Research Letters, 24:42–48.

Pedersen, M. et al. (2015). The impact of commodity price shocks in a major producing economy. the case of copper and chile. Technical report, Central Bank of Chile.

Schipper, B. W., Lin, H.-C., Meloni, M. A., Wansleeben, K., Heijungs, R., and van der Voet, E. (2018). Estimating global copper demand until 2100 with regression and stock dynamics. Resources, Conservation and Recycling, 132:28–36.

Spilimbergo, A. (2002). Copper and the chilean economy, 1960-98. The Journal of Policy Reform, 5(2):115–126.

Wang, Y., Cao, X., Sui, X., and Zhao, W. (2019). How do black swan events go global?-evidence from us reserves effects on tocom gold futures prices. Finance Research Letters, 31.

Watari, T., Northey, S., Giurco, D., Hata, S., Yokoi, R., Nansai, K., and Nakajima, K. (2022). Global copper cycles and greenhouse gas emissions in a 1.5° c world. Resources, Conservation and Recycling, 179:106118.

Worthington*, A. and Valadkhani, A. (2004). Measuring the impact of natural disasters on capital markets: an empirical application using intervention analysis. Applied Economics, 36(19):2177–2186.

Yin, L. and Han, L. (2013). Exogenous shocks and information transmission in global copper futures markets. Journal of Futures Markets, 33(8):724–751.

Zaremba, A., Mikutowski, M., Szczygielski, J. J., and Karathanasopoulos, A. (2019). The alpha momentum effect in commodity markets. Energy Economics, page 104421.