Returns and Hazard Mitigation: Evidence from Tropical Cyclones

Advisor: Marcelo Medeiros

In this paper, we provide evidence that information about hazard mitigation infrastructure in the United States (U.S.) during an indirect exposure to tropical cyclones and the indirect exposure to tropical cyclones per se generate anomalies in returns after considering the 5 Fama-French factors and momentum. We formulate two possible hypotheses to explain these anomalies: local investor and general market hypotheses. Both hypotheses assume that hazard mitigation investments are lower than the ideal. Their difference is based on how investors interpret the hazard mitigation programs. We focus on local investors’ perceptions about them in the local investor hypothesis. More significant investments in these programs mean more local investors will acknowledge them and their flaws. On the other hand, we focus on general investors’ associations between hazard mitigation investment level and disaster risk in the general market hypothesis. In the end, we give some evidence of the local investors’ hypothesis, but we cannot guarantee that this is the only possible explanation. The whole point depends on how much investors know about hazard mitigation programs. Beyond that, we give evidence that an information channel is the probable path in which the anomalies are generated. Thus, in this dissertation, we shed some light on the uncertainty generated by natural disasters that prices assets, a topic that gets more attention in a warming world.