Making Profit out of Airplane Crashes

Abstract

According to behavioral finance, negative emotions drives negative sentiment that affects the decision to invest and may affect asset pricing. In this study we examine the effect of aviation disasters on the movement of the stock return of both the crashing airline and the competitor of the crashing airline over 50 years period, in order to detect the significant movement to form a profitable portfolio right after the crash happens. Moreover, we also study how the cumulative abnormal return of the portfolio and the crashing airline's stock would change due to various conditions. From the evidence, we find that there is a significant decrease in the cumulative abnormal return of the crashing airline and a significant increase in the cumulative abnormal return in the competitors’ airline’s stocks. Moreover, we also found an evidence that there is an increase in the cumulative abnormal return of the crashing airline as the crash happens further away from the stock market that the crashing airline's stock is listed. This could be inferred that people feel less emotional as the aviation crash happens further away from them. Thus, the Heuristc Theory also applies to this study.