Pacic-Basin Finance Journal 25 (2013) 240252

Contents lists available at ScienceDirect

Pacic-Basin Finance Journal

journal homepage: www.elsevier.com/locate/pacfin

Investor response to a natural disaster: Evidence

from Japan's 2011 earthquake
Matthew Hood a, Akiko Kamesaka b, John Nofsinger c,, Teruyuki Tamura d
a
Department of Finance and Economics, Texas State University, United States
b
School of Business Administration, Aoyama Gakuin University and Economic and Social Research Institute, Cabinet Ofce, Government of
Japan, Japan
c
Department of Finance and Management Science, Washington State University, United States
d
Graduate School of Economics, Sophia University, Japan

a r t i c l e i n f o a b s t r a c t

Article history: Japan's most powerful known earthquake struck at 2:46 p.m. on
Received 22 April 2013 Friday, March 11, 2011. We study the unusual trading behaviors of
Accepted 23 September 2013 individual and foreign investors in Japan during the aftermath of this
Available online 4 October 2013
natural disaster. Individual investors typically show contrarian
trading patterns, so the sharp downturn in the Nikkei should cause
JEL classication:
positive net purchases. Instead, purchases were signicantly less than
G01
sales in the week after the earthquake. Foreign investors typically
G15
G02
show positive feedback and momentum trading patterns. However,
in the week after the earthquake, they seemed to have stabilized the
Keywords: Japanese stock markets by dramatically increasing their trading
Natural disaster activity and net purchases.
Earthquake 2013 Elsevier B.V. All rights reserved.
Japan
Individual investors
Foreign investors

1. Introduction

The Great East Japan Earthquake, which struck at 2:46 p.m. on Friday, March 11, 2011, is the strongest
known earthquake to hit Japan. This earthquake, also known as the 2011 Tohoku earthquake, is one of
only ve worldwide to register a 9.0 or higher magnitude in the past one hundred years. It was so
powerful that it moved Japan eight feet away from the continent of Asia. As with most coastal earthquakes
along the Ring of Fire, the tsunami it triggered was its most damaging aspect. Waves reached one hundred
and thirty feet high and washed inland as far as six miles. To date, the National Police Agency (2013) in
Japan has conrmed 15,883 deaths and another 2671 people are still missing. Early estimates of the
insured losses were around 25 billion dollars and the total estimated economic cost exceeded 200 billion
dollars. The most notorious damage was to three nuclear reactors that failed and exploded.

Corresponding author at: Department of Finance and Management Science, College of Business, Washington State University,
Pullman, WA 99164-4746, United States. Tel.: + 1 509 335 7200.
E-mail address: john_nofsinger@wsu.edu (J. Nofsinger).

0927-538X/$ see front matter 2013 Elsevier B.V. All rights reserved.
http://dx.doi.org/10.1016/j.pacn.2013.09.006
 M. Hood et al. / Pacic-Basin Finance Journal 25 (2013) 240252 241

Events causing a great fear or shock to the nancial markets of an entire country or region are,
thankfully, rare. The 19971999 Asian nancial crisis that struck Thailand, Indonesia, South Korea, the
Philippines, and Hong Kong is, perhaps, the most studied (Mishkin, 1999). Although the Asian currency
crisis did not directly affect the yen, it did inuence Japan's economy. Karolyi (2002) examined the effect
this volatile and poor-performing period had on foreign investors in Japan. He believes that foreigners
were scared out of Japan as net purchases turned negative during this period. However, he notes that their
positive feedback trading behavior did not change during the crisis nor did their trading activity induce
volatility.
We study the reaction of investors in Japan to the 2011 Tohoku earthquake. We focus on individual and
foreign investor behavior because Japanese institutional investors are known to be long-term and stable
shareholders, especially rms belonging to the keiretsu business groups (Kim and Nofsinger, 2005). There
are many studies about the trading behavior of individual and foreign investors and a few that focus on the
Japanese stock market. In normal trading activity, individuals exhibit contrarian trading patterns (see
Odean, 1998 in the United States; Grinblatt and Keloharju, 2000 in Finland; Chen et al., 2007 in China) and
foreigners are positive feedback traders (Brennan and Cao, 1997; Froot et al., 2001). In Japan, Bae et al.
(2008) reported that the contrarian trading of individual investors comes from prot-taking patterns of
sell trades. Kim and Nofsinger (2007) studied normal trading behavior of Japanese individual investors
and found that they tilt more toward positive feedback trading during the long bull market. Conversely,
they lean toward negative trading in bear markets. Kamesaka et al. (2003) reported positive feedback
trading for foreign investors, which Choe et al. (1999) attributed to their reliance on market prices in their
decisions because they have less information.
Little literature exists about market reactions to natural disasters. Shelor et al. (1990) examined the
price reaction of real estate companies after the California earthquake of 1989. They found that the stock
price reaction contained important new information. Worthington and Valadkhani (2004) investigated
the reaction of the Australian stock market to 42 severe storms, cyclones, oods, earthquakes, and
bushres. Wang and Kutan (2013) examined the reaction of the Japanese and United States stock markets
to the 2011 earthquake, focusing on the insurance industry. Brounen and Derwall (2010) investigated the
international stock market reaction to terrorist attacks and compared them to the unanticipated events of
earthquakes. They found that the price reaction was stronger for terrorist attacks than earthquakes.
However, none of these papers investigated the reaction of investors to the natural disasters.
Kamesaka (2013) investigated the effect of the Great East Japan earthquake on investor behavior. She
rst identied the stock market price behavior during the weeks around the quake and the surrounding
eight months. Then she examined the weekly trading of six types of investors in Japan using the TOPIX
index and the stock of Tokyo Electric Power. Kamesaka (2013) concluded that foreign investors were net
buyers of stock after the earthquake, while securities companies and nancial institutions were net sellers.
Our paper examines investor weekly trading behavior around the same earthquake, but we are more
interested in comparing the atypical reaction of investors to this natural disaster than the typical reaction
to a market decline.
Our results support both the contrarian trading patterns of individual investors and the positive
feedback trading of foreign investors on the stocks of the largest companies on the Tokyo Stock Exchange
during non-earthquake periods. The correlation between the ratio of purchases-to-sales and the weekly
performance of the Nikkei was 66% for individuals and 36% for foreigners. The ratio of purchases-
to-sales was also correlated with the recent past performance of the Nikkei. The correlation between the
ratio of purchases-to-sales and the performance of the Nikkei over the past three weeks was 19% for
individuals and 29% for foreigners.
Does investor behavior change in response to a natural disaster? Since foreign investors are positive
feedback traders, we would expect them to be net sellers the week after the earthquake. This behavior
would exacerbate the market decline and further destabilize the market. However, foreign investors
purchased 11.2% more than they sold (178 billion yen per trading day) that week. Foreigners were also
extremely active, their purchases and sales averaged 3355 billion yen per day that week, increasing
their share of the aggregate market activity from 47.4% to 60.9%. Foreign investors traded very
differently in response to this earthquake than they did in response to the smaller earthquake that
struck Kobe in 1995, the Asian currency crises that began in 1997, and their normal patterns during
2008 to 2012.
242 M. Hood et al. / Pacic-Basin Finance Journal 25 (2013) 240252

As contrarian investors, Japanese individual investors would normally be net buyers during a sharp
downturn, like that seen in the Nikkei 225 Index. (It closed on Friday, March 18, 10.2% below its close on
March 11.) Yet, their need to increase liquidity that week could diminish that nave expectation and build
the anticipation that they would be very active traders. Individual investors, in fact, bought 6.0% less than
they sold that week and were very active in the stock market; their daily market activity averaged
917 billion yen that week, 80% greater than their average over the entire sample.
Popular opinion is that foreign investors destabilize local nancial markets. This opinion is not
supported by previous research nor this research. Hamao and Mei (2001) found no systematic evidence
that foreign investors' trading induces market volatility more than domestic trading. We nd that foreign
investors actually comprise a smaller share of the aggregate daily market activity in volatile markets, after
controlling for performance.
Section 2 describes our data and the stock market's reaction to the Tohoku earthquake. Section 3
explores the impact of the earthquake on individual and foreign investors' trading activity. The
robustness check in Section 4 compares these results with the market activities of individuals and
foreigners from the Great Hanshin earthquake in Kobe on January 17, 1995. Section 5 offers our
concluding remarks.

2. Data description

2.1. Sample statistics

The Tokyo Stock Exchange accounts for 7% of the world's stock market capitalization. It is the third
largest stock exchange in the world, by both market capitalization (four trillion dollars) and by average
daily market activity (twenty billion dollars), according to the World Federation of Exchanges (2011). The
exchange divides the stock listings into three groups based on market capitalization. The First Section has
the largest 1673 companies, the Second Section has the next largest 429 companies, and MOTHERS
(market of the high-growth and emerging stocks) has the remaining 174 companies (Tokyo Stock
Exchange, 2011). Trading occurs in two and one-half hour sessions: the morning session from 9:00 to
11:30 and the afternoon session from 12:30 to 3:00. The earthquake struck at 2:46 p.m. on a Friday, so the
stock market felt very little of the impact until trading opened on Monday. Corroborating this hypothesis is
the fact that on the day of the earthquake, March 11, 2011, the Nikkei Index closed just 0.5% less than it
opened; 1.2% below the intraday high.
The most common barometer of the Japanese stocks is the Nikkei Index, which uses 225 companies
listed on the Tokyo Stock Exchange to reect the overall market. One month before the earthquake, the
Nikkei stood at 10,624. Trading in the stocks of the First Section of the Tokyo Stock Exchange accounts for
more than 90% of all the main stock exchanges. We focus on the activity in the First Section and use the
Nikkei to determine market performance and volatility for this group.
Our sample begins on January 21, 2008 and ends on March 23, 2012 with trading data compiled by
the Tokyo Stock Exchange. We have 164 weeks of data before the earthquake and 54 weeks after the
earthquake. Using this sample, we study the impact of the earthquake on the market activity both
purchases and sales of individual and foreign investors on stocks in the First Section of the Tokyo
Stock Exchange. All the data are weekly. Since nearly one quarter of the weeks have a trading holiday
and these weeks average only 3.7 trading days, each observation is divided by the number of trading
days that week.
For the 218 weeks of the sample, the average Daily Market Activity for all investors (aggregate) was
2959 billion yen. Japanese individual investors averaged 509 billion yen, 17% of the aggregate. Foreign
investors averaged 1402 billion yen, or 47% of the aggregate (see Table 1). The week of the earthquake
(Week 0) was representative of the sample; 3312 billion yen worth of securities in the First Section were
bought or sold per day. Of that amount, individuals traded 469 billion yen and foreigners traded
1678 billion yen. During the next week (Week 1), which began on March 14, 2011, the aggregate
increased to 5512 billion yen per day, of which individuals purchased or sold 917 billion yen and
foreigners purchased or sold 3355 billion yen. The week after the earthquake had nearly double the
normal Daily Market Activity.
 M. Hood et al. / Pacic-Basin Finance Journal 25 (2013) 240252 243

Table 1
Descriptive statistics for investor trading activity and the Nikkei Index. The sample is shown in Panel A and consists of 218 weekly
observations, January 21, 2008 to March 23, 2012. The means and standard deviations of the weekly observations tied to the Great
East Japan earthquake are presented. The total trading Daily Market Activity and the Net Purchases for individual and foreign investors
are reported. The weekly trading data on First Section stocks is divided by the number of trading days that week. The Daily Market
Activity gures are in billions of yen. The Net Purchases are the fraction of the aggregate attributed to that group. Panel B reports the
sample statistics for the week of the earthquake (Week 0) and the four weeks following the natural disaster.

Panel A sample statistics

Mean Standard Minimum First quartile Median Third quartile Maximum

deviation

Daily Market Activity

Aggregate 2959 864 1151 2362 2688 3221 6211
Individual 509 146 256 387 483 606 934
Foreign 1402 458 355 1071 1296 1647 3355

Net Purchases
Individual 0.4% 13.4% 31.6% 10.1% 1.8% 8.4% 57.6%
Foreign 1.1% 7.4% 20.3% 3.1% 0.9% 4.5% 28.8%

Nikkei Index
Volatility 4.7% 3.9% 1.2% 2.7% 3.7% 5.3% 33.6%
Performance 0.2% 3.5% 23.5% 2.1% 0.2% 1.8% 13.3%
Past performance 0.3% 6.3% 30.2% 4.0% 0.2% 3.5% 19.9%

Panel B post earthquake trading activity

Week 0 Week 1 Week 2 Week 3 Week 4

3/7/11 to 3/14/11 to 3/22/11 to 3/28/11 to 4/4/11 to

3/11/11 3/18/11 3/25/11 4/1/11 4/8/11

Daily Market Activity

Aggregate 3312 5512 4225 3477 3129
Individual 469 917 752 580 477
Foreign 1678 3355 2430 1976 1810

Net Purchases
Individual 31.7% 6.0% 12.8% 9.5% 5.8%
Foreign 2.0% 11.2% 0.9% 4.2% 8.3%

Nikkei Index
Volatility 4.0% 22.2% 2.5% 5.4% 2.9%
Performance 3.5% 8.3% 1.4% 1.8% 0.1%
Past performance 0.6% 7.2% 10.5% 10.2% 2.7%

Purchasest Salest
Daily Market Activityt 1
Trading Dayst

Daily Market Activityt

Share of the Daily Market Activityt 2
Aggregate Daily Market Activityt

To better understand the sentiment of Japanese individuals and foreign investors, we compare their
purchases and sales. Net Purchases is the difference between purchases and sales that week divided by the
number of trading days that week. The Ratio of Purchases to Sales is the percentage difference between
daily purchases and sales. This variable is independent of the number of trading days. Over the entire four
years of the sample, Japanese individuals purchased an average of 0.4% less than they sold and foreigners
purchased 1.1% more than they sold. The standard deviations are large, 13.4% for individuals and 7.4% for
foreigners. During Week 1, the week after the March 11, 2011 earthquake, individuals purchased 6.0% less
than they sold and foreigners purchased 11.2% more than they sold.
244 M. Hood et al. / Pacic-Basin Finance Journal 25 (2013) 240252

Purchasest Salest
Net Purchasest 3
Trading Dayst

Purchasest Salest
Ratio of Purchases to Salest 4
Salest

Previous research suggests that investors, particularly foreign investors, are likely to continue their
own trading patterns from week to week. To capture this possibility, we created Past Investor Activity
variables for each dependent variable (Daily Market Activity, Share of the Daily Market Activity, Net
Purchases, and the Ratio of Purchases to Sales) and for both individual and foreign investors. Each variable is
calculated identically to its dependent variable counterpart by combining the preceding three weeks of
purchases and sales.
For each week in the study, we record the open on the rst trading day of the week, the close on the
last trading day of the week, and the high and the low recorded during the week for the Nikkei 225 Index.
We dene Volatility as the percentage difference between the high and the low and Performance as the
percentage difference between the close and the open. Both of these variables are strictly related to
trading during the observation week. Past Performance is the third measure derived from the Nikkei and
refers to the change in the index from the open three weeks earlier to the open that week. For Week 1, the
high was 22.2% above the low (Volatility), the close was 8.3% below the open (Performance), and the open
was 7.2% below its open three weeks earlier (Past Performance). Examining the means and standard
deviations for these market measures for the full 218 weeks shows the dramatic response to the
earthquake. Volatility was 4 standard deviations above the mean, Performance was 2 standard deviations
below the mean, and Past Performance was 1 standard deviation below the mean.

Hight Lowt
Volatilityt 5
Lowt

Closet Opent
Performancet 6
Opent

Opent Opent3
Past Performancet 7
Opent3

2.2. The market and the earthquake

The Great East Japan earthquake struck with just 14 min remaining in the last trading session of the
week of March 7 to 11, 2011 (Week 0). It is unlikely that the traders responded quickly enough to alter
their portfolios based on their needs and expectations and for the Nikkei Index to adequately reect the
new economic reality. Week 1 reects the bulk of the impact of the 2011 earthquake. The Nikkei opened
on March 14 at 2.1% below its close on March 11 and then closed on March 18 another 8.3% lower than
that. The high for the trading the week after the earthquake was 22.2% above the low. After the
earthquake, the stock market performed poorly and was very volatile.
Trading for the rst week after the earthquake was exceptionally heavy. The aggregate Daily Market
Activity was 5512 billion yen that week, far above the average of 2959 billion yen for the sample period of
January 2008 to March 2012. We would expect foreign investors practicing momentum trading to stampede
out of Japanese stocks with a large downturn. Nationalistic fears of foreign investors and their propensity to
sell in bear markets made them scapegoats for several emerging economies during the currency crises in the
1990s. However, foreign investors' purchases outweighed their sales by 178.31 billion yen per day (11.2%)
from March 14 to 18, 2011.
 M. Hood et al. / Pacic-Basin Finance Journal 25 (2013) 240252 245

3. Empirical estimation

The stock market declined during the week following the earthquake. We aim to separate investors'
trading behavior connected with market corrections from trading behavior caused by the natural disaster.
We present our methods in this section.

3.1. Iterated feasible generalized least squares regression methods

The Daily Market Activity of Japanese individual investors and foreign investors has a correlation of 59%;
when one investor group is active, the other is also likely to be active. The Ratio of Purchases to Sales of
individual and foreign investors has a correlation of 59%; if one investor group is purchasing more than
they are selling then the other investor group is likely to be selling more than they are purchasing.
Therefore, we anticipate that the contemporaneous error terms from ordinary least squares regressions
are correlated, requiring the more robust iterative feasible generalized least squares model to reach the
best linear unbiased estimator of the coefcients. The equations, procedure, and results follow.
First, we estimate the individual and foreign activity variables in a single regression with the Individual
Activity measure (as the Daily Market Activity, Share of the Daily Market Activity, Net Purchases, or Ratio of
Purchases to Sales) stacked above its Foreign Activity counterpart. The explanatory variables are identical
for both individual and foreign investors except that each uses its own Past Activity measure. The data
matrix structure for the estimation is:





Individual Activityt X INDt 0 ^
INDt
 ^ Ind Act ;
Foreign Activityt 0 X FORt For Act FORt

where
2 30
1
6 IPost Quaket 7
6 7
6 Week 7
6 t 7
6 Volatilityt 7
6 7
6 Performance 7
6 t 7
6 Past Performancet 7
X INDt 6 7
6 Past IndividualActivityt 7
6 7
6 IWeek 0t 7
6 7
6 IWeek 1 7
6 t 7
6 IWeek 2t 7
6 7
4 IWeek 3t 5
8
IWeek 4t

And
2 30
1
6 IPost Quaket 7
6 7
6 Week 7
6 t 7
6 Volatilityt 7
6 7
6 Performance 7
6 t 7
6 Past Performancet 7
6
X FOR t 6 7
7
6 Past Individual Activityt 7
6 IWeek 0 7
6 t 7
6 IWeek 1t 7
6 7
6 IWeek 2 7
6 t 7
4 IWeek 3t 5
IWeek 4t

With the understanding that the contemporaneous error terms are correlated, we perform feasible
generalized least squares regressions and iterate between solving for the coefcients and estimating the
246 M. Hood et al. / Pacic-Basin Finance Journal 25 (2013) 240252

variancecovariance matrix until satisfying convergence. We estimate the coefcient and variance
covariance matrices as:




1


^

0 0
Ind Act
X INDt 0
0 V
^ 1 X INDt 0

X INDt 0
0 V
^ 1 Individual Activityt
^
0 X FOR t 0 X FORt 0 X FORt Foreign Activityt
For Act

where 9


1
1 INDt
V INDt FOR t   IT :
FORt

We estimate eight dependent variables. For the rst two regressions, we use the total amount of
trading for individuals and foreigners, in billions of yen, as the dependent variables. Then we use the
percentage of the aggregate trading attributed to individuals and foreigners. These four dependent
variables explain the activity levels of individual and foreign investors. Then we estimate regressions to
explain the direction of the activity. First, we assign the difference between purchases and sales, in billions
of yen per trading day, of individuals and foreigners as dependent variables. Then, we use the percentage
difference between purchases and sales of individual and foreign investors as the dependent variables.

3.2. Trading activity results

We are interested in the investor behavior due to a reaction to the Tohoku earthquake itself, separate
from the typical reaction to a volatile and declining stock market. In other words, stock markets
periodically have weeks with unusually low performance and high volatility that are not caused by a
traumatic natural disaster. We seek the trauma reaction to the natural disaster. Thus, we need to identify
common trading activity to isolate the earthquake's effect on investors. This subsection examines the
coefcients for Volatility, Performance, and Past Performance for all eight coefcients from Eq. (9). Volatility
is the percentage difference between the high and low for the week as dened in Eq. (5). Performance is
the percentage difference between the close and the open for the week as dened in Eq. (6). Past
Performance is the percentage change between the open and the open three weeks previously as dened
in Eq. (7).
Table 2 examines individual and foreign investor trading activity. Panel A reports the results for the
Daily Market Activity as the dependent variable. For individual investors, the coefcients for Volatility and
Performance are remarkably similar, 651.4 and 649.6, respectively; both are signicant at the one percent
level. An increase of 1% in either Volatility or Performance results in an increase of 6.5 billion yen in the
Daily Market Activity of individual investors. Panel B reports the coefcients for the Share of the Market
Activity. Individual investors' Share of the Daily Market Activity increases by 0.09% for a 1% increase in
Volatility (signicant at the ve percent level) and by 0.17% for a 1% increase in Performance (signicant at
the one percent level). We conclude that individual investors are more active when the market conditions
are volatile and when performance is good. These variables control for market activity caused by the stock
market decline after the earthquake.
The earthquake occurred in the last few minutes of trading on Friday, March 11, 2011 (Week 0). Thus,
we look at Week 1 and the other week indicator variables to see the reaction of individual investors. The
coefcients for Week 1 and Week 2 are 384.1 and 219.4, respectively, and both are signicant at the 1%
level. Individuals traded 384 billion yen per day more than their typical trading patterns would suggest
from the market conditions during the rst week after the earthquake. The excess trading quickly tapers
off. The coefcient for Week 3 is insignicant and it is signicantly negative for Week 4. Although
individuals traded substantially more in the rst two weeks after the natural disaster, their share of the
aggregate was relatively unchanged; all of the coefcients for Weeks 1 to 4 in Panel B are near zero and
insignicant.
Table 2 presents foreign investor regression results on the right-hand side. The coefcients for Volatility
and Performance are not signicant for the Daily Market Activity (Panel A). Therefore, it is not surprising
that the foreign investor Share of the Daily Market Activity is signicantly negative (Panel B) because the
other investor groups become more active in volatile and good performing markets. An increase of 1% in
Volatility results in a 0.08% decrease in the Share of Daily Market Activity of foreign investors. An increase of
 M. Hood et al. / Pacic-Basin Finance Journal 25 (2013) 240252 247

Table 2
Investor Daily Market Activity in currency and in share of the aggregate. The sample consists of weekly observations from January 21,
2008 to March 23, 2012. The iterated feasible generalized least squares regression statistics for the Total Daily Market Activity of
individual and foreign investors is reported in Panel A. Panel B reports their Share of the (Aggregate) Total Daily Market Activity. The
variables Volatility, Performance, and Past Performance control for normal investor behavior in volatile and high performing markets.
Five indicator variables (Week 0 to 4) are included to analyze the trading during the weeks after the Tohoku Earthquake (March 11,
2011). ***, **, and * denote signicance at the 1%, 5%, and 10% levels.

Individuals Foreigners

Coefcients P-values Coefcients P-values

Panel A: Daily Market Activity, in billions of yen

Constant 87.67 *** 0.0% Constant 202.60 *** 0.0%
After quake 2.21 90.0% After quake 26.04 65.1%
Week 0.33 ** 2.4% Week 0.13 76.8%
Volatility 651.40 *** 0.0% Volatility 647.20 19.6%
Performance 649.58 *** 0.0% Performance 167.96 71.8%
Past performance 483.01 *** 0.0% Past performance 67.36 80.5%
Past individual DMA 0.73 *** 0.0% Past foreign DMA 0.83 *** 0.0%
Week 0, 3/73/11 51.75 47.6% Week 0, 3/73/11 9.28 96.7%
Week 1, 3/143/18 384.06 *** 0.0% Week 1, 3/143/18 1564.61 *** 0.0%
Week 2, 3/223/25 219.36 *** 0.3% Week 2, 3/223/25 347.90 13.4%
Week 3, 3/284/1 25.61 72.9% Week 3, 3/284/1 325.50 16.3%
Week 4, 4/44/8 164.85 ** 2.6% Week 4, 4/44/8 572.55 ** 1.4%
Observations, R2 218 76.1% Observations, R2 218 76.2%

Panel B: Daily Market Activity, share of the aggregate

Constant 0.04 *** 0.0% Constant 0.09 *** 0.0%
After quake 0.00 79.6% After quake 0.00 64.1%
Week 0.00 31.1% Week 0.00 *** 0.3%
Volatility 0.09 ** 2.0% Volatility 0.08 * 8.6%
Performance 0.17 *** 0.0% Performance 0.17 *** 0.0%
Past performance 0.14 *** 0.0% Past performance 0.11 *** 0.0%
Past individual share 0.76 *** 0.0% Past foreign share 0.83 *** 0.0%
Week 0, 3/73/11 0.03 * 9.9% Week 0, 3/73/11 0.02 43.9%
Week 1, 3/143/18 0.01 53.4% Week 1, 3/143/18 0.08 *** 0.1%
Week 2, 3/223/25 0.03 10.1% Week 2, 3/223/25 0.01 54.9%
Week 3, 3/284/1 0.01 51.1% Week 3, 3/284/1 0.00 94.9%
Week 4, 4/44/8 0.01 44.0% Week 4, 4/44/8 0.00 98.3%
2
Observations, R 218 71.5% Observations, R2 218 88.7%

1% in Performance results in a 0.17% decrease in the Share of Daily Market Activity of foreign investors. This
nding contradicts the popular opinion that trading by foreigners causes volatility. Foreign investors
traded much more in reaction to the earthquake. The coefcient for Week 1 (Panel A) suggests that the
reaction caused by the natural disaster led to an extra 1.5 trillion yen of trading per day in the week after
the earthquake. Combining this with the size and signicance of the coefcient for the Share of the Daily
Market Activity (Panel B) suggests that foreign investors were extremely active in the markets as a
reaction to the earthquake. This reaction was short-lived. The Daily Market Activity of foreign investors is
not signicantly positive for Week 2. It is negative, but insignicant for Week 3 and then negative and
signicant for Week 4.

3.3. Purchase versus sales results

The stability of markets hinges more on the balance between buying and selling rather than the total
market activity. Therefore, we study the Net Purchases (Panel A) and the Ratio of Net Purchases (Panel B)
for individual and foreign investors in Table 3. While a highly volatile market impacts total trading
(Table 2) of individual and foreign investors, it does not have inuence the direction of trading. That is,
Volatility is not a signicant contributor to the difference in purchases and sales for individual or foreign
investors (Table 3).
248 M. Hood et al. / Pacic-Basin Finance Journal 25 (2013) 240252

Table 3
Investor Net Purchases in currency and in share of the aggregate. The sample consists of weekly observations from January 21, 2008
to March 23, 2012. The iterated feasible generalized least squares regression statistics for the Net Purchases (in billions of yen) of
individual and foreign investors is reported in Panel A. Panel B reports their Share of the (Aggregate) Net Purchases. The variables
Volatility, Performance, and Past Performance control for normal investor behavior in volatile and high performing markets. Five
indicator variables (Week 0 to 4) are included to analyze the trading during the weeks after the Tohoku Earthquake (March 11,
2011). ***, **, and * denote signicance at the 1%, 5%, and 10% levels.

Individuals Foreigners

Coefcients P-values Coefcients P-values

Panel A: Net Purchases, per trading day, in billions of yen

Constant 6.14 18.6% Constant 7.07 30.3%
After quake 9.16 16.3% After quake 13.08 17.3%
Week 0.06 19.1% Week 0.07 30.6%
Volatility 67.42 25.3% Volatility 49.23 56.9%
Performance 695.16 *** 0.0% Performance 498.57 *** 0.0%
Past performance 91.01 ** 2.4% Past performance 115.34 ** 1.6%
Past individual net 0.11 25.3% Past foreign Net 0.57 *** 0.0%
Week 0 48.79 * 6.9% Week 0 2.21 95.4%
Week 1 75.24 *** 0.9% Week 1 200.69 *** 0.0%
Week 2 52.31 * 5.3% Week 2 34.90 37.4%
Week 3 18.86 48.3% Week 3 7.53 84.8%
Week 4 7.89 76.7% Week 4 20.61 59.5%
Observations, R2 218 48.3% Observations, R2 218 39.5%

Panel B: Ratio of Purchases to Sales

Constant 0.02 30.2% Constant 0.01 30.9%
After quake 0.03 13.7% After quake 0.02 19.4%
Week 0.00 12.4% Week 0.00 31.5%
Volatility 0.25 23.8% Volatility 0.10 42.7%
Performance 2.60 *** 0.0% Performance 0.79 *** 0.0%
Past performance 0.20 16.0% Past performance 0.13 * 6.0%
Past individual ratio 0.23 ** 1.1% Past foreign ratio 0.63 *** 0.0%
Week 0 0.26 *** 0.7% Week 0 0.00 96.3%
Week 1 0.25 ** 1.5% Week 1 0.14 ** 2.4%
Week 2 0.16 * 9.7% Week 2 0.04 44.5%
Week 3 0.06 55.5% Week 3 0.01 83.0%
Week 4 0.03 71.3% Week 4 0.03 57.8%
Observations, R2 218 51.7% Observations, R2 218 39.3%

Investors, however, do react strongly to the current and past moves of the market. Both the
Performance and Past Performance coefcients are generally signicant for all four dependent variables
contrasting buying activity with selling activity. Japanese individual investors commonly decrease their
purchases relative to their sales in weeks when the stock market is performing well and after strong
performances over the preceding three weeks. An increase in Performance of 1%, ceteris paribus, reduces
Net Purchases by 7.0 billion yen per day, and the Ratio of Purchases to Sales by 0.03%. These results are
consistent with previous ndings that individual investors in Japan are normally contrarian traders. The
combination of increased total activity by individual investors simultaneously with increased selling in
weeks with positive returns supports the conclusion (Bae et al., 2008) that individual investors are prot
takers.
After establishing that Japanese individuals are contrarian investors, we examine their reaction to
the earthquake. The stock market fell sharply in Week 1. After controlling for their normal contrarian
tendency to buy stocks in a down market, we nd that the coefcient for Week 1 in Panel A is 75.24,
which is signicant at the one percent level. The coefcient for Week 1 in Panel B is also signicantly
negative. From Table 1, individual investors purchased 6% less than they sold in the week immediately
after the earthquake. The coefcient for Week 1 in Panel B of Table 3 is 0.25, therefore, individual
investors would have been expected to purchase 19% (= 6% to 25%) more than they sold. The
trauma of the earthquake completely overcame their normal contrarian trading behavior until Week 2.
From March 22 to 25, 2011 individual investors purchased 12.8% more than they sold (Table 1), which
 M. Hood et al. / Pacic-Basin Finance Journal 25 (2013) 240252 249

is reected in the positive and signicant coefcient for Week 2 in the regression on the Ratio of
Purchases to Sales.
Table 3 also examines the contrast of purchases and sales of foreign investors in Japan. Prior research
(Choe et al., 1999 and Kamesaka et al., 2003) suggested that they tend to be momentum investors. Our
results are consistent with this conjecture. We nd their purchases to outweigh their sales when the stock
market is performing well; an increase in Performance of 1% corresponds to expand Net Purchases by
5.0 billion and the Ratio of Purchases to Sales by 0.79%. Both coefcients are signicant at the one percent
level. The coefcients for Past Performance are in the same direction, but they are muted in magnitude and
in signicance. A 1% increase in Past Performance coincides with 1.2 billion yen more purchases than sales
per day, or 0.01% more in the ratio.
Now that we have established that foreign investors in Japan are momentum traders, we examine
their reaction to the earthquake. We know that the stock market declined in the rst week after the
earthquake, yet foreign investors purchased 11.2% more than they sold that week (Table 1). The
coefcients for Week 1 in both Panels A and B of Table 3 are signicantly positive Foreign investors' Net
Purchases and were 200 billion yen per day more than expected. Their Ratio of Purchases to Sales was 14%
more than expected. So, foreign investors reacted to the natural disaster by making contrarian trades,
which is abnormal when you consider their typical momentum trading. Their contrarian trades of more
purchases than sales are a stabilizing presence in a declining market. The test statistics for individual and
foreign investors accounts for the correlation between the two because of the choice of iterated feasible
least squares for the regression model. However, the effects of the March 11, 2011 earthquake on
purchases relative to sales did not persist past the rst week for foreign investors. Although they
purchased more than they sold for each of the other three weeks, none of the coefcients are signicant
for these weeks in Table 3.
A declining stock market quickly followed the Great East Japan earthquake and individual and foreign
investors did not trade in their normal fashions during this market decline. Our methods allow us to
isolate their reaction to the natural disaster from their reaction to market declines. We conclude that both
individuals and foreign investors traded substantially more as a reaction to the earthquake and that the
normally contrarian individuals became net sellers and the normally momentum trading foreigners
became net buyers of stock. The natural disaster caused abnormal net purchasing behavior for both groups
of investors.

4. The 1995 Kobe earthquake

Since 1950, there have been 22,764 deaths attributed to earthquakes in Japan, most of which came in
the twenty-four earthquakes that registered a magnitude of 7.0 or greater. Seventy percent of these deaths
came from the Great East Japan earthquake on March 11, 2011 and 28% came from the Great Hanshin
earthquake that struck on January 17, 1995, very near to Kobe. The Great Hanshin earthquake killed 6434
people and registered a magnitude of 7.2. The remaining 447 fatalities from earthquakes since 1950 came
from nineteen different earthquakes. Although, the Great Hanshin earthquake in 1995 was much weaker
and less destructive than the Great East Japan earthquake, it is much more similar to it than any other
earthquake since 1950.
The Great Hanshin earthquake struck Kobe at 5:46 a.m. on Tuesday, January 17, 1995. The markets had
not yet opened in Japan that week because of the trading holiday for Coming of Age Day on the previous
day. So that week (January 17 to 20, 1995) parallels in timing to March 14 to 18, 2011 (Week 1) from the
Great East Japan earthquake. The Nikkei opened on January 17, 1995 at 19,322 and closed on January 20,
1995 at 18,840, down 2.5% much less than the 8.3% fall during the week immediately after the Great East
Japan earthquake. The variation between the intraday low and high that week was also muted: 3.2%
compared to 22.2% following the bigger earthquake. We repeat our statistical procedures for the 1995
Kobe earthquake using sample data from January 25, 1993 to December 26, 1997.
Investor trading is shown in Table 4. Individual investors were particularly active for both of the rst
two weeks after the earthquake in 2011. The rst trading week after the earthquake in 1995, however,
is not signicantly positive. But the coefcients for Week 2 and Week 3 (January 23 to 27, 1995 and
January 20 to February 3, 1995) are signicantly positive in both billions of yen per trading day and
share of the aggregate. Foreign investors were particularly active in the rst week of trading after the
250 M. Hood et al. / Pacic-Basin Finance Journal 25 (2013) 240252

Table 4
Investor Daily Market Activity in currency and in share of the aggregate for the Great Hanshin earthquake. The sample consists of
weekly observations from January 25, 1993 to December 26, 1997. The iterated feasible generalized least squares regression statistics
for the Total Daily Market Activity of individual and foreign investors is reported in Panel A. Panel B reports their Share of the
(Aggregate) Total Daily Market Activity. The variables Volatility, Performance, and Past Performance control for normal investor
behavior in volatile and high performing markets. Five indicator variables (Week 0 to 4) are included to analyze the trading during
the weeks after the Great Hanshin Earthquake (January 17, 1995) and the surrounding weeks. ***, **, and * denote signicance at the
1%, 5%, and 10% levels.

Individuals Foreigners

Coefcients P-values Coefcients P-values

Panel A: Daily Market Activity, in billions of yen

Constant 29.15 *** 0.1% Constant 17.27 ** 1.7%
After quake 0.44 96.3% After quake 19.09 ** 2.4%
Week 0.03 58.3% Week 0.30 *** 0.0%
Volatility 415.40 *** 0.1% Volatility 419.35 *** 0.0%
Performance 513.09 *** 0.0% Performance 310.88 *** 0.0%
Past performance 370.48 *** 0.0% Past performance 179.56 *** 0.0%
Past individual DMA 0.59 *** 0.0% Past foreign DMA 0.59 *** 0.0%
Week 0, 1/91/13 24.09 52.0% Week 0, 1/91/13 6.09 84.9%
Week 1, 1/171/20 41.70 26.6% Week 1, 1/171/20 69.62 ** 3.0%
Week 2, 1/231/27 95.05 ** 1.2% Week 2, 1/231/27 56.38 * 7.8%
Week 3, 1/302/3 160.25 *** 0.0% Week 3, 1/302/3 49.45 12.0%
Week 4, 2/62/10 37.88 31.4% Week 4, 2/62/10 51.13 10.7%
Observations, R2 257 59.2% Observations, R2 257 67.0%

Panel B: Daily Market Activity, share of the aggregate

Constant 0.09 *** 0.0% Constant 0.12 *** 0.0%
After quake 0.02 ** 4.4% After quake 0.02 ** 2.5%
Week 0.00 *** 0.0% Week 0.00 *** 0.0%
Volatility 0.08 36.2% Volatility 0.04 66.6%
Performance 0.21 *** 0.2% Performance 0.18 *** 0.5%
Past performance 0.21 *** 0.0% Past performance 0.12 *** 0.3%
Past individual share 0.52 *** 0.0% Past foreign share 0.37 *** 0.0%
Week 0, 1/91/13 0.04 21.0% Week 0, 1/91/13 0.01 59.3%
Week 1, 1/171/20 0.03 31.7% Week 1, 1/171/20 0.06 ** 2.6%
Week 2, 1/231/27 0.05 * 5.6% Week 2, 1/231/27 0.04 17.3%
Week 3, 1/302/3 0.11 *** 0.0% Week 3, 1/302/3 0.04 11.6%
Week 4, 2/62/10 0.02 53.1% Week 4, 2/62/10 0.03 20.0%
2
Observations, R 257 59.1% Observations, R2 257 64.2%

earthquake in 2011. The coefcients for the rst week after the 1995 earthquake are also signicantly
positive, but are smaller in magnitude. While the direction of the activity responses is very similar for
investors for the two earthquakes, the amount for foreign investors and the speed for Japanese
individual investors is not nearly as dramatic for the less serious earthquake.
The most intriguing feature of the March 11, 2011 earthquake is the stabilizing force of foreign
investors. They greatly increased their activity and their purchasing outweighed their selling, which
presumably kept the Nikkei Index from falling even more than it did. We do not observe foreign
investors acting in a stabilizing manner after the January 17, 1995 earthquake, nor did the Japanese
markets need it. None of the Net Purchases or Ratio of Purchases to Sales coefcients are signicant for
foreigners for any of the ve weeks around the 1995 earthquake (see Table 5). If there was a stabilizing
force in 1995, it was by individual Japanese investors. The coefcient for Week 1 is 0.26 and purchases
outpaced sales by 0.07. The coefcient for Week 2 is 0.31 and purchases outpaced sales by 0.26. Finally,
the coefcient for Week 3 is 0.30 and purchases outpaced sales by 0.19. Net purchases are always
positive and the coefcients are all signicantly positive.
The 1995 earthquake that rocked Kobe did not have the same impact on the stock market and
investors as the 2011 earthquake that rocked the East coast of Japan. In 1995, the stock market dipped
only slightly and was stable and Japanese individuals, rather than foreigners, were the major net
purchasers of stocks.
 M. Hood et al. / Pacic-Basin Finance Journal 25 (2013) 240252 251

Table 5
Investor Net Purchases in currency and in share of the aggregate for the Great Hanshin earthquake. The sample consists of weekly
observations from January 25, 1993 to December 26, 1997. The iterated feasible generalized least squares regression statistics for the
Net Purchases (in billions of yen) of individual and foreign investors is reported in Panel A. Panel B reports their Share of the
(Aggregate) Net Purchases. The variables Volatility, Performance, and Past Performance control for normal investor behavior in volatile
and high performing markets. Five indicator variables (Week 0 to 4) are included to analyze the trading during the weeks after the
Great Hanshin Earthquake (March 11, 2011). ***, **, and * denote signicance at the 1%, 5%, and 10% levels.

Individuals Foreigners

Coefcients P-values Coefcients P-values

Panel A: Net Purchases, per trading day, in billions of yen

Constant 5.59 *** 0.0% Constant 3.17 31.1%
After quake 2.88 15.9% After quake 5.58 19.6%
Week 0.02 14.3% Week 0.03 35.6%
Volatility 91.35 *** 0.0% Volatility 33.43 52.7%
Performance 107.84 *** 0.0% Performance 182.81 *** 0.0%
Past performance 26.09 ** 2.2% Past performance 104.36 *** 0.0%
Past individual net 0.45 *** 0.0% Past foreign net 0.60 *** 0.0%
Week 0 0.53 94.6% Week 0 11.98 47.6%
Week 1 8.92 25.1% Week 1 10.43 53.5%
Week 2 17.70 ** 2.4% Week 2 17.12 31.2%
Week 3 27.34 *** 0.1% Week 3 4.88 77.2%
Week 4 2.38 76.4% Week 4 15.46 35.8%
Observations, R2 257 34.4% Observations, R2 257 47.3%

Panel B: Ratio of Purchases to Sales

Constant 0.12 *** 0.0% Constant 0.07 * 9.7%
After quake 0.07 * 7.5% After quake 0.07 23.2%
Week 0.00 22.1% Week 0.00 22.6%
Volatility 1.93 *** 0.0% Volatility 0.55 44.1%
Performance 2.20 *** 0.0% Performance 1.85 *** 0.0%
Past performance 0.60 *** 0.2% Past performance 1.21 *** 0.1%
Past individual ratio 0.58 *** 0.0% Past foreign ratio 0.60 *** 0.0%
Week 0 0.07 62.4% Week 0 0.28 20.2%
Week 1 0.26 * 5.8% Week 1 0.17 43.5%
Week 2 0.31 ** 2.4% Week 2 0.16 46.8%
Week 3 0.30 ** 2.7% Week 3 0.06 79.5%
Week 4 0.03 81.5% Week 4 0.14 53.0%
2
Observations, R 257 46.6% Observations, R2 257 48.4%

5. Conclusions

A natural disaster hurts the local economy and causes a correction to local stock markets. The 2011
Tohoku earthquake, which struck Japan at 2:45 p.m. on Friday, March 11, 2011, and its ensuing tsunami,
are strong examples of such a natural disaster. Real GDP fell by 0.8% in 2011 and the Nikkei 225 Index
nished 2011 at 8455, down 17.3% from the previous year (The World Factbook, 2012). Most of the loss
in the stock market occurred immediately after the earthquake; the Nikkei opened on the day of the
earthquake at 12,299, up 0.7% for the year, and fell as far low as 8228 in the week after the earthquake.
Domestic individual investors might have needed liquidity and were extremely active in the market,
selling more than they purchased, regardless of their typical activity in poor performing weeks.
Japanese individual investors' Daily Market Activity was nearly 400 billion yen greater than expected.
However, their share of the aggregate market activity was not substantially different than expected
because foreign investors also became extremely active in the Japanese stock markets. Their Daily
Market Activity was nearly 1600 billion yen greater than expected, increasing their share of the market
activity to 60.9%.
Typically, individual investors were net purchasers when market conditions were poor. However, in
the week after the earthquake, their purchases were 28 billion yen less than their sales per day. Foreign
investors more than picked up the slack coming from Japanese individual investors; their purchases
outweighed sales by 178 billion yen per day. One is left to wonder what would have happened to the
252 M. Hood et al. / Pacic-Basin Finance Journal 25 (2013) 240252

Nikkei 225 Index and the Japanese economy if foreign investors had been neutral, or worse, if they had
responded by momentum investing with the downturn as they routinely do.

Acknowledgment

Akiko Kamesaka's research is supported by Grants-in-Aid for Scientic Research (C) 24530358 from
the Japan Society for the Promotion of Science.

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