Investigating Power Laws in Hurricane Damages

Abstract

Recent research indicates that the energy generated by hurricanes follows a power law distribution. We hypothesize that economic damages caused by hurricanes also follow a power law distribution. Using yearly hurricane damage data from 1900-2005 we show that the distribution of yearly damages due to hurricanes in the US may follow either a power law or lognormal distribution. Furthermore, if the distribution of damages follows a power law, then for the best-fit distribution, the tail of the distribution is so ‘fat’ that the variance of damages, conditional on being in the tail, is potentially unbounded.

Keywords: hurricane, power law, Pareto distribution, natural hazard

JEL Classification: Q54