Essays on Impacts of Avian Influenza Outbreaks on Financial Markets
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A recent outbreak of bird flu or avian influenza (AI), an especially highly pathogenic strain (HPAI) of H5N1, started in Hong Kong in January 2003 and caused 159 human deaths in Asia, Africa and Europe through early 2007. In addition, this outbreak resulted in millions of slaughtered birds and banned international trade of poultry meat in the infected countries. Such events harmed the poultry, tourism, and other related industries in the infected countries and changed the world poultry trade flow. Even in some uninfected countries, related industries were negatively affected. This study investigates the impact of bird flu outbreaks as manifested in financial markets within the US and Japan. The first essay explores how the avian influenza (AI) outbreaks impacted the security values of poultry-related firms. Using partial equilibrium analysis, this study infers that within a country AI outbreaks drop stock prices of poultry meat producers and raise stock prices of poultry food producers. Simultaneously, we infer that AI outbreaks in other poultry exporting countries raise stock prices of poultry meat producers and drop stock prices of poultry food producers. The empirical findings support our model results. Recent developments in time series method, directed graphs and search methods of cointegration rank are applied in this study. The second essay examines whether avian influenza outbreaks cause structural breaks in a model of their prices. It employs the dynamic programming algorithm and the reduced regression method for a cointegrated vector autoregressive (VAR) model to compute the break dates for the data sample. This research then compares the long run relation, and the short run relation and contemporaneous relation. The model estimations in these three sub-periods find these three sub-samples are significantly different. The breaks were caused by the invasion of Iraq on March 2003 and the 20 Bovine Spongiform Encephalopathy (BSE) induced ban of Canadian live cattle imports to the US on 03 March 2005, not by avian influenza outbreaks in early 2004. The third essay explores the effects of the avian influenza announcement in Japan on the prices of agricultural commodity futures contracts traded in Japan. Both the VAR model with asymmetric generalized autoregressive conditional heteroskedastic (GARCH) terms and the event study methods were used to examine whether avian influenza outbreaks significantly affected these markets. Our findings point out that the avian influenza outbreak only impacted the egg futures contract. These three essays found that outbreaks of avian influenza have significant impact on poultry-related stock prices and futures markets. The examined impacts changed the movement of those financial equity prices in the short run, but not in the long run. Research showed investors and poultry-related producers still encounter huge financial risk and loss.