Forum for Science, Industry and Business

Sponsored by:     3M 
Search our Site:

 

What Investors Have Learned from the Major Earthquake

21.09.2011
Psychological Changes from the Viewpoint of Stock Prices and Housing Prices. By: Yuichiro Kawaguchi, Professor at the Faculty of Commerce, Waseda University

1. Introduction

The Great East Japan Earthquake has dramatically altered the way the Japanese economy is seen. For example, the way that housing and real estate values are seen in Japan has changed since 3.11. Location value is what determines the values of homes and real estate. Before the major earthquake, for example, locations for residential areas in the Tokyo metropolitan area with beautiful townscapes were highly appraised, even if they were landfill sites. The preferences of people toward residential areas have greatly changed since 3.11, however. Safety is now more of a concern than factors such as convenience and comfort. Factors such as whether or not there are active faults or the durability of the ground, which had been viewed as relatively unimportant, have all suddenly become important issues. Let us take a look at the psychological changes that have occurred in people’s minds after the major earthquake through stock and housing prices.

2. Major Earthquakes and Stock Prices

May 11, 2011 is the day that a 9-magnitude earthquake struck East Japan. On the following Monday, March 14, the Nikkei average stock price had dropped 6.2%. There was not much else in the news that was significant, and this dropping in stock prices was due to the huge earthquake.

On January 17 sixteen years ago, a 7.2-magnitude earthquake struck the Hanshin-Awaji area. The day that the stock market was affected the most by this earthquake was also the following Monday. On January 23rd, the Nikkei average stock price had dropped 5.6%. There was not much else in the news that was significant, and this dropping in stock prices was also due to the huge earthquake.

The Japanese stock market reacted to these two major earthquakes with up to about 6% drops in stock prices on a daily basis. This can be seen as a universal scale for measuring the level of response that the market has shown to the major earthquakes as unexpected factors.

In the East Japan case, however, there were chain-reaction explosions at the nuclear power plant in Fukushima on March 15. The market immediately reacted to this second unexpected factor, and the Nikkei average dropped 10.6% on that same day. In the Hanshin-Awaji case, there was no such second tragedy, and that is why the point drop range of stock prices one week after the major earthquakes was very different in each of these cases. The Nikkei average dropped only 8.3% at most in the Hanshin-Awaji case, but it dropped as far as 16.8% in the East Japan case.

Interestingly, although the market reacted differently to these two major earthquakes as shown above, the Nikkei average point drop range as of sixteen business days (about three weeks) from the earthquake disasters in both cases showed convergences at about the same levels (about 5% drops).

3. Major Earthquakes and Housing Prices

Markets such as the housing and real estate markets react differently to major earthquakes than the stock market does. Let us examine this while referring to the TSE Home Price Index, which provides monthly changes in the trading prices of used condominiums in the metropolitan area.

In order to understand the effects of major earthquakes, the long-term fluctuations (trends) must be eliminated from housing price fluctuations, and the fluctuations (cycles) that are disassociated from this are to be derived (Figure 1). After the Great Hanshin-Awaji Earthquake, the cycle components of the housing price index of the metropolitan area dramatically dropped for a long period of time (eighteen months). On the other hand, the dropping in prices after the Great East Japan Earthquake was no more than one-tenth of that in the Hanshin-Awaji case.

In the Hanshin-Awaji case, housing price cycles decreased the most eight months after the earthquake disaster so there is a chance that they will decrease the most around November 2011 in the case of the Great East Japan Earthquake. However, the point drop range should be very low when judging from the current situation.

Housing prices in the metropolitan area reacted differently with the two major earthquakes. The following two factors may be the reasons why. The first is the difference in the types of earthquakes that struck. The earthquake in the Hanshin-Awaji type was an inland-type and the earthquake in the East Japan case was a trench-type, and the damages such as destroyed houses are far greater when there are inland-type earthquakes. Furthermore, trends of housing prices already significantly dropped at the time around the Great Hanshin-Awaji Earthquake. In contrast, housing price trends had remained stable at low levels for a long time when the Great East Japan Earthquake occurred.

4. Conclusion - What Investors Have Learned from the Major Earthquake

New levels of stock prices and housing prices suggest the possibility that the Japanese economy is seen in a new and completely different way after the major earthquake. It can be said, however, that the effects on stock prices, housing prices, and so on that the Great East Japan Earthquake had are not so huge when compared with the effects brought upon by the bursting of Japan’s real estate bubble in 1990 or the fall of Lehman Brothers in the autumn of 2008. Figure 2 shows the transitions in stock prices and housing prices in Japan and the US from the bursting of Japan’s real estate bubble to now. The world has seen six rare phenomena including currency crises, fiscal crises, economic bubble collapses, and financial crises during the roughly sixteen years between the Great Hanshin-Awaji and East Japan earthquakes.

The Great East Japan Earthquake once again showed investors that rare circumstances occur frequently. The importance of risk management has been further elevated.

Yuichiro Kawaguchi
Professor, Faculty of Commerce, Waseda University
Born in 1955. Received a Doctorate in engineering from the University of Tokyo in 1991. Founded Real Estate Financial Engineering in 2000 as a new field of study after studying as a Visiting Researcher at the University of Cambridge in 1996. Appointed as Professor on the Faculty of Commerce, Waseda University (Graduate School of Finance, Accounting and Law) in 2004. Research activities include those as Chairman of the Japanese Association of Real Estate Financial Engineering, the Asian Real Estate Society (Vice President as of 2011), and with the American Real Estate and Urban Economics Association. Appointed as Director of the Center for International Real Estate Research, Waseda University in 2007 and Director of the Waseda Institute of Finance in 2010.

Developed a housing price index as Chairman of the Housing Price Index Exploratory Committee of the Ministry of Land, Infrastructure and Transport in 2007 through the Reviews on the Status of Indexes Concerning Trends in the Housing Market report. Serves as a provisional member of the National Property Subcommittee of the Ministry of Finance’s Fiscal System Council, and as Director of the Japan Housing Finance Agency Subcommittee of the Ministry of Finance’s Evaluation Committee for Incorporated Administrative Agencies.

Major publications include Real Estate Financial Engineering [Fudousan Kinyu Kogaku] (Seibunsha, 2000) and Concepts and Skills for Real Options [Riaruopushon No Siko To Gijutu]” (Diamond, Inc., 2004).

waseda university | Research asia research news
Further information:
http://www.waseda.jp/top/index-e.html
http://www.researchsea.com

More articles from Business and Finance:

nachricht Mathematical confirmation: Rewiring financial networks reduces systemic risk
22.06.2017 | International Institute for Applied Systems Analysis (IIASA)

nachricht Frugal Innovations: when less is more
19.04.2017 | Fraunhofer-Institut für Arbeitswirtschaft und Organisation IAO

All articles from Business and Finance >>>

The most recent press releases about innovation >>>

Die letzten 5 Focus-News des innovations-reports im Überblick:

Im Focus: Nanoparticles help with malaria diagnosis – new rapid test in development

The WHO reports an estimated 429,000 malaria deaths each year. The disease mostly affects tropical and subtropical regions and in particular the African continent. The Fraunhofer Institute for Silicate Research ISC teamed up with the Fraunhofer Institute for Molecular Biology and Applied Ecology IME and the Institute of Tropical Medicine at the University of Tübingen for a new test method to detect malaria parasites in blood. The idea of the research project “NanoFRET” is to develop a highly sensitive and reliable rapid diagnostic test so that patient treatment can begin as early as possible.

Malaria is caused by parasites transmitted by mosquito bite. The most dangerous form of malaria is malaria tropica. Left untreated, it is fatal in most cases....

Im Focus: A “cosmic snake” reveals the structure of remote galaxies

The formation of stars in distant galaxies is still largely unexplored. For the first time, astron-omers at the University of Geneva have now been able to closely observe a star system six billion light-years away. In doing so, they are confirming earlier simulations made by the University of Zurich. One special effect is made possible by the multiple reflections of images that run through the cosmos like a snake.

Today, astronomers have a pretty accurate idea of how stars were formed in the recent cosmic past. But do these laws also apply to older galaxies? For around a...

Im Focus: Visual intelligence is not the same as IQ

Just because someone is smart and well-motivated doesn't mean he or she can learn the visual skills needed to excel at tasks like matching fingerprints, interpreting medical X-rays, keeping track of aircraft on radar displays or forensic face matching.

That is the implication of a new study which shows for the first time that there is a broad range of differences in people's visual ability and that these...

Im Focus: Novel Nano-CT device creates high-resolution 3D-X-rays of tiny velvet worm legs

Computer Tomography (CT) is a standard procedure in hospitals, but so far, the technology has not been suitable for imaging extremely small objects. In PNAS, a team from the Technical University of Munich (TUM) describes a Nano-CT device that creates three-dimensional x-ray images at resolutions up to 100 nanometers. The first test application: Together with colleagues from the University of Kassel and Helmholtz-Zentrum Geesthacht the researchers analyzed the locomotory system of a velvet worm.

During a CT analysis, the object under investigation is x-rayed and a detector measures the respective amount of radiation absorbed from various angles....

Im Focus: Researchers Develop Data Bus for Quantum Computer

The quantum world is fragile; error correction codes are needed to protect the information stored in a quantum object from the deteriorating effects of noise. Quantum physicists in Innsbruck have developed a protocol to pass quantum information between differently encoded building blocks of a future quantum computer, such as processors and memories. Scientists may use this protocol in the future to build a data bus for quantum computers. The researchers have published their work in the journal Nature Communications.

Future quantum computers will be able to solve problems where conventional computers fail today. We are still far away from any large-scale implementation,...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

Event News

Ecology Across Borders: International conference brings together 1,500 ecologists

15.11.2017 | Event News

Road into laboratory: Users discuss biaxial fatigue-testing for car and truck wheel

15.11.2017 | Event News

#Berlin5GWeek: The right network for Industry 4.0

30.10.2017 | Event News

 
Latest News

Previous evidence of water on mars now identified as grainflows

21.11.2017 | Physics and Astronomy

NASA's James Webb Space Telescope completes final cryogenic testing

21.11.2017 | Physics and Astronomy

New catalyst controls activation of a carbon-hydrogen bond

21.11.2017 | Life Sciences

VideoLinks
B2B-VideoLinks
More VideoLinks >>>