COLEGIO DE STA.

TERESA DE AVILA
School of Hospitality and Tourism Management
6 Kingfisher St., Zabarte Subd., Brgy. Kaligayahan, Novaliches
Quezon City 1124 Philippines

The financial market effects of

international aviation
disasters

CASE STUDY

BY

CANEZARES, KATRINA BHEA N.

BSTM 3-2
 COLEGIO DE STA. TERESA DE AVILA
School of Hospitality and Tourism Management
6 Kingfisher St., Zabarte Subd., Brgy. Kaligayahan, Novaliches
Quezon City 1124 Philippines

Introduction

Aviation firms are still concerned about the dissemination of false information about
aviation mishaps. A large portion of this data typically consists of conjecture regarding
the origin and accountability of the event, which may unintentionally produce
considerable price volatility in the financial markets. In this study, we examine some
stylized facts about airline disasters' impact on aviation stocks, taking into account
information flows, price discovery sources within the industry as a whole, and contagion
effects. In recent years, the aviation industry has faced a number of very rare dangers in
addition to some incredibly rare incidents that few other businesses have to deal with.
For businesses that have been unlucky enough to suffer such catastrophes, it is crucial
to comprehend the dynamics of financial market behavior and how investors view such
risk. Aviation businesses face significant challenges in what is already seen as a very
competitive market, with little room for error. These kinds of pressures might show up as
extraordinary managerial and industrial pressure to meet industry standards for
performance.
Studied how aviation disasters affected the stock values of the affected airlines and their
competing carriers in a crash, and discovered that the affected airline had deeper
negative anomalous returns as the number of fatalities increased. But, in large-scale
disasters, the stock values of the competing airlines also suffer; but, in minor disasters,
the stock prices of the competing airlines benefit somewhat. Different aspects of the
company and the accident itself seem to have influenced how much the initial price
decrease was. Numerous pertinent policy consequences arise from research on aircraft
mishaps. The vulnerability of the market to abrupt and catastrophic shocks may be
significantly increased due to the influence of social media and the dissemination of
false or malicious information following such incidents.
While it is true that social media has made it easier for information to be shared and
views to be formed, which allows for the quick and easy sharing of images and videos
so that viewers can form their own opinions, it is also true that this increased efficiency
may have unintended consequences, such as the ability to profit from the spread of
false information, which not only causes undue distress to the companies and families
involved in tragedies like these but also impedes rescue efforts and inspires other
market participants who do not fear current regulatory and policing efforts.
 COLEGIO DE STA. TERESA DE AVILA
School of Hospitality and Tourism Management
6 Kingfisher St., Zabarte Subd., Brgy. Kaligayahan, Novaliches
Quezon City 1124 Philippines

Background of the Study

In this study, we examine the validity of certain stylized facts about how airline disasters
affect aviation stocks and how they spread throughout the entire industry. Initially, we
examine whether investors' response mechanisms to aviation disasters differ over time
and across different regions, or if there has been a response variation that may be
linked to the relative severity of injury and fatality caused by each individual incident.
Firstly, it is evident that there have been significantly high levels of volatility in share
prices; however, there is evidence indicating that this volatility has considerably
diminished between 2005 and 2019. We find a significant rise in unconditional volatility
in the ten days following the aeroplane disaster, suggesting strong short-term
implications when conducting an EGARCH analysis to examine particular volatility
effects. Despite the fact that the shock to unconditional volatility seems to happen right
away, there is evidence that, within sixty days of the incident, it fades and returns to pre-
aviation levels.

 Previous Literature
- While a great deal of study has been done on the structure and performance of
the aviation industry, relatively little has been done on the existence of sectoral
interactions between competing and geographically similar aircraft enterprises.
Large aviation incidents have the potential to create huge risk for the entire
industry, therefore research of this kind is extremely valuable in permitting
theoretically-plausible pathways of linkage.
- Chance and Ferris (1987), discovered that these incidents were ring-fenced off
from the general sector in the middle of the 1980s. Nevertheless, a lot of
research has started to focus on the spread of news through various
technological channels today, and this has resulted in fairly strong theoretical
foundations to suggest that such results might not exist nearly three decades
later.
 COLEGIO DE STA. TERESA DE AVILA
School of Hospitality and Tourism Management
6 Kingfisher St., Zabarte Subd., Brgy. Kaligayahan, Novaliches
Quezon City 1124 Philippines

- Ho et al. (2013), discovered that while rival businesses' share prices do rise
when significant sectoral incidents occur, if the incident is deemed trivial, there
are anomalous returns in place.
- Kaplanski and Levy (2010), examined the impact of aviation mishaps on stock
values while taking sentiment into account. The authors find evidence of
significant negative stock market reactions, elevated perceived risk, and implied
volatility in the event of a market loss of more than US$60 million, even in the
absence of evidence of an increase in real volatility. Naturally, this kind of
outcome is not exclusive to the aviation industry.
- Carpentier and Suret (2015), discovered that while these losses do occur in a
large proportion of significant accidents, they do not last.
- Ho et al. (2013), discovered that whereas competitor airlines' stock values suffer
in major disasters but profit when the number of casualties is low, airlines
involved in crashes see deeper negative anomalous returns as the severity of the
accident increases.
- Hung and Liu (2005), When estimating equity costs and determining a stock's fair
price, one can utilise the beta value, which is a measure of systematic risk. This
will reveal that airline betas are not only affected by stock return and volatility but
also by volatility and volatility over time.
 Data and methodology
- Starting by compiling a short list of aircraft mishaps, which can be employed in a
comprehensive and strong methodological study by examining parent firms that
trade on stock exchanges and their subsequent results. The relative lack of a
coherent financial market in the preceding period led to the identification of this
particular time frame. Thomson Reuters Eikon is the source of the stock price
information we have chosen. A single result from each of the chosen search
 COLEGIO DE STA. TERESA DE AVILA
School of Hospitality and Tourism Management
6 Kingfisher St., Zabarte Subd., Brgy. Kaligayahan, Novaliches
Quezon City 1124 Philippines

engines must be present in order to acquire a valid observation, and the source
must be identified as either an international news agency, a mainstream
domestic news agency, or the announcement's own company. We deliberately
set out to study the immediate pricing and volatility effects on the stock prices of
the firm that owned the lost plane in order to advance our understanding of
tragedies within the aviation sector. We also examine if this volatility effect has
evolved in the time after the general expansion. The association between each
company and the aviation index's broad measure is then examined in a
secondary study using a DCC-GARCH analysis.

Summary of Discussion

The findings of this study are relevant to traders, regulators, policymakers, and the
entire aviation industry. Although it is not surprising that financially troubled aviation
companies in these circumstances show notable and severe adverse effects, it would
be interesting to learn more about the origins of this risk and whether it spreads to the
aviation industry as a whole. If evidence of a significant relationship is found, this could
raise concerns about the sector's overall financial stability and increase the likelihood
that problems like moral hazard and asymmetric information will arise because less
compliant, weaker companies may have an impact on the expansion, development, and
financial stability of compliant companies.

Results

We examine whether investors' response mechanisms to aviation disasters differ

geographically and over time, or if there has been a variation in response that could be
linked to the severity of injury and death caused by each individual incident, using a
number of incredibly detailed databases. By including analysis on the connections
 COLEGIO DE STA. TERESA DE AVILA
School of Hospitality and Tourism Management
6 Kingfisher St., Zabarte Subd., Brgy. Kaligayahan, Novaliches
Quezon City 1124 Philippines

between the incident companies and the larger aviation industry, as well as the
information flow and price discovery that may be deemed abnormal when compared to
pre-disaster averages, we are able to produce even more novelty. This suggests that
although there has been a gradual decrease in the impact of price drops over time,
share price volatility has increased. When geographic differences are taken into
account, these effects are also found to be significant, with the highest negative effects
being experienced by enterprises in North America and South America. Ten-day period
before and after the aeroplane disaster, a significant number of companies experienced
a substantial spike in unconditional volatility, indicating strong short-term effects.
However, based on twenty-day, forty-day, and sixty-day windows of inquiry, respectively,
it is found that such effects fade. These findings show that although the shock to
unconditional volatility seems to happen right away, it seems to fade and go back to
what it was sixty days after the flight occurrence. Significant variations in dynamic
conditional correlation are noted for events that have transpired in Asia, Europe, and
North and South America, in that order. Furthermore, we discover that there were
significant drops in information flow between the airline and the aviation industry for
each scenario that was examined. This suggests that the routes for information flow and
price discovery that would have normally existed in the time frame before the aviation
accident have been permanently disrupted.

Conclusion and Recommendations

Expert views on the causes of the financial crisis and solutions to it have not aligned,
and care must be taken when extrapolating lessons about policy from an unparalleled
event. The notion that larger advanced economies might have benefited from a longer-
term fiscal expansion is becoming increasingly prevalent. However, given the
information known at the time, discussions over the relative danger of various strategies
will probably go on. In any event, when the growth outlook deteriorated, the financial
 COLEGIO DE STA. TERESA DE AVILA
School of Hospitality and Tourism Management
6 Kingfisher St., Zabarte Subd., Brgy. Kaligayahan, Novaliches
Quezon City 1124 Philippines

market assistance was willing to reevaluate its recommendations for fiscal policy and
called for a slower rate of consolidation. According to this assessment, the financial
market assistance assisted several member nations in lessening the effects of the
crisis, and both partners and member countries valued the financial market
contributions to the international response to the crisis. Additionally, it discovered that
there were areas in which the financial market operations should be strengthened in
order to better alert members to growing threats and vulnerabilities, as well as
measures to reduce them, and to better position them to support the international safety
net. In order to guarantee that the financial market has the resources to assist in future
crisis resolution, management ought to collaborate with. Quotas ought to be adequate
to meet members' needs in the event of a crisis, with borrowing plans in place to
address unforeseen circumstances.

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