The Impact of the 2019 Australian Bushfire: Financial Markets, Air Pollution, and Economic Effects

Research by: Minhua Yang, Florian Gerth, Vikash Ramiah, and Glenn W. Muschert

Executive Summary

The purpose of this study is to empirically analyze the financial, economic, and, to a lesser extent, environmental effects of 2019 Australian bushfires on the regional and national economic and financial environment within the Australian economy.

In the last 120 years, more than 260 major bushfires have occurred in Australia. Claiming the lives and likelihoods of hundreds of people and destroying hundreds of millions of hectares of land. The 2019 bushfires are not an exception. Rather, its unprecedented veracity has sparked public, as well as academic, debate about possible economic, financial, and environmental consequences. Given that lack of, and at best incomplete empirically founded evidence on a regional and national level on the topic, this paper uses a modified version of the off-the-shelve event study methodology in order to discuss the applicability of the (or lack therefore) efficient-market hypothesis. To discern cause-and-effect relationships, as well as to take account of geographical and entrepreneurial idiosyncrasies, we use the difference-in-difference (DID) estimation technique which accounts for possible firm-level and geographical heterogenous effects, as well as changes in the regime in terms of cross-sectional as well as time-series correlations.

The main contributions of the paper are as follows:

1. Analysis of stock-market effects of the 2019 bushfires in Australia.
2. Determining possible risk premia for firms categorized into environmentally friendly and polluters.
3. Considering regional and national idiosyncrasies, therefore allowing spill-over effects of regional phenomena on a national level.
4. Analyzing the bushfire’s consequences on the tourist sector; an important part of the Australian economy and driver of real economic activity.

The paper shows that depressed investor’s mood leads to a countrywide financial impact, which tends to be long lasting. On the other hand, regional effects are self-correcting, bringing financial valuations back to their fundamental values. It is observed that polluting firms experience an increase in their stock market returns during bushfire season – consistent with the theory of increased risk premiums in times of uncertainty. Regarding economic activity, it confirms that the countrywide tourism sector, which employs a significant fraction of Australia’s labor force, continues to be severely impaired by regional fires. Unlike previous studies, this paper documents that bushfires have a substantial and harmful impact on Australia’s air quality. A battery of robustness tests (range of event windows, controlling for information leakage, and changing macroeconomic conditions) validate the findings.

To cite this article:  Yang, M., Gerth, F., Ramiah, V., & Muschert, G. (2023). The Impact of the 2019 Australian Bushfire: Financial Markets, Air Pollution, and Economic Effects. Review of Pacific Financial Markets and Policies, 26(3), 1-21. https://doi.org/10.1142/S0219091523500200.

To access this article: https://doi.org/10.1142/S0219091523500200

About the Journal

Review of Pacific Basin Financial Markets and Policies deals with quantitative and qualitative research involving financial markets and policies of the Pacific Basin area. The papers published present useful theoretical and methodological results with the support of interesting empirical applications. Purely theoretical and methodological research with the potential for important applications is also published.

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