Earthquakes and Stock Market Performance: Evidence from Japan

This paper examines the stochastic behaviour of the number of earthquakes (in total and also classified by magnitude) and stock market log prices and returns in the case of Japan over the period from January 2009 to February 2024 using fractional integration methods. Their linkages are then investigated by means of regression analysis. The results indicate that the former variable exhibits short-memory, I(0) behaviour. By contrast, stock market prices appear to be an I(d), fractional integration process, with d less than 1. Since the orders of integration of the two variables are different, we treat seismic events as exogenous in the context of a regression model with stock returns. The findings suggest that earthquakes have a statistically significant, though relatively small, negative impact on the Nikkei 225 index. More specifically, there exists a negative relationship between the magnitude and number of earthquakes and monthly stock returns. This suggests that seismic activity creates uncertainty in the market, which in turn affects its performance.