Drs. Jason and Kristin Fink Study Hurricanes and Their Effects on the Market
Hurricane in the forecast? You might want to top off your gas tank – or buy some shares of Exxon stock. According to recent research published by Drs. Jason and Kristin Fink, the price of gas will rise if a hurricane is forecast, as will the stock prices of major refineries.
The Finks have recently published three research papers examining the impact of hurricanes on the price of energy, and the stock price of oil companies. Their interest in hurricanes started about ten years ago when they purchased a home in the Florida Keys. “Because it’s so prone to hurricanes, we just began to watch hurricanes every year. And being statisticians, we began really watching hurricanes and being familiar with how the forecasting works. We even came to know the names of the forecasters,” says Kristin. She adds they began to wonder what happens to energy prices when hurricanes are forecast.
Jason notes that there had been no research to determine if the markets really believe the forecasts of the National Hurricane Center (NHC). The NHC provides good forecasts for major metropolitan areas. He says, “We wanted to see if the financial markets believed in these forecasts, and to what extent.”
The first paper examined futures contracts, called “crack spread” contracts. The name comes from the fact that the carbon chain is cracked when oil is refined. The crack spread is really the difference between heating oil and gasoline, minus the cost of crude oil. Jason explains, “It’s the spread between the product and the input. When the hurricanes roll through, the spread is what would be affected.”
He adds, “Asset prices don’t react when the bad event happens; they react when people realize the bad event is going to happen.” The Finks gathered the forecasts from the NHC back to the early 90s, which were provided every six hours. They wanted to determine when in advance of the storm the asset prices reacted. “That let us know which hurricane forecast they believed,” says Jason. They found the assets believed in the 24-hour forecast, jumping by about 13 percent.
In the second paper, the Finks looked at stock prices of companies that were producing the gas. Jason says, “We again looked at when they reacted. We broke it up into the 1990s and the 2000s. In the 1990s, people believed the forecast at the 24-hour horizon; in the 2000s, they were reacting at the 48-hour horizon. This was directly tied to the accuracy of the NHC forecasts, which were as accurate for the 48-hour horizon in the 2000s as they had been for the 24-hour horizon in the 1990s.”Allison Russell, a quantitative finance alumnus, helped research and write the first paper.
The Finks discovered an unexpected trend during their research. “For the most part, stock prices went up during hurricanes, not down,” says Jason, adding, “It was puzzling at first. But when we looked closer at it, we realized it was only the largest refineries whose prices were going up. The small ones weren’t really affected.” They concluded that the large refineries have refining capacity in other locations; they are spread out. The large refining firms are able to capitalize on the increase in gasoline prices. They are able to profit from the refined energy spikes that occur during the hurricanes.Kristin adds, “Because the NHC got better in its forecasting ability, markets picked up on that and started believing farther out and reacting to it earlier.”
Their third paper focused on the impact of long-range forecasts for the hurricane season, which come out in December, June, and August. The Finks researched the newspaper articles that ran the seasonal forecasts so they could pinpoint exact dates of the predictions.
They tested the reaction of the crack spread futures to these seasonal forecasts. Jason says, “Although the odds of getting hit by a hurricane are astronomically low, we found that with the June and August forecasts there actually was a jump in the crack spread futures; the more active the season, the greater the jump. The spreads don’t react at all to the December forecasts.”
This research provides valuable information for investors. Jason notes, “Purely from a timing standpoint, if you’re worried about a hurricane moving through somewhere, if you want to get out before the risk is likely to manifest itself, you’d want to get out prior to the forecast horizon where you know the market reacts.” He adds, “It appears that energy firms are able to increase their refining capacity at other locations. Knowing that they actually benefit financially from these hurricanes lessens their need for financial assistance from the government.”
The Finks’ research reinforces the old adage that timing is everything!