Do Announcements of WTO Dispute Resolution Cases Matter? Evidence from the Rare Earth Elements Market

90 Pages Posted: 17 Apr 2017 Last revised: 24 Sep 2018

See all articles by Juliane Proelss

Juliane Proelss

Concordia University, Quebec; Trier University of Applied Sciences

Denis Schweizer

Concordia University

Volker Seiler

Xi'an Jiaotong-Liverpool University; University of Paderborn

Date Written: April 23, 2018

Abstract

Rare earth elements (REEs) have gained increasing attention recently for several key reasons:

1) they are vital to many strategic industries,

2) they are relatively scarce,

3) they frequently exhibit high price fluctuations,

4) China holds a quasi-monopoly on their mining, and

5) China’s REE policy, which was overly restrictive and led to a formal complaint from the U.S., Japan, and the EU at the World Trade Organization (WTO) in 2012.

This paper investigates whether the announcement of a WTO dispute resolution case has the power to fundamentally change market dynamics. We find empirical support for this notion because REE prices exhibit a structural break around the announcement of the WTO dispute, and show lower variance ratios for all tested REEs afterward. This indicates a tendency toward efficiency, although REE prices still do not follow a random walk. Similarly, we find that stock price informativeness of companies in the REE industry increases after the announcement, reflecting more firm-specific than marketwide information and less governmental influence. Finally, we show that model uncertainty for option pricing models decreases, which we measure by the lower pricing differences among them.

Keywords: Market Efficiency, Rare Earth Elements, Stock Price Informativeness, Structural Break Tests, Variance Ratio Tests, World Trade Organization (WTO)

JEL Classification: C22, C58, F13, G14, G18, G28, Q02, Q38

Suggested Citation

Proelss, Juliane and Schweizer, Denis and Seiler, Volker, Do Announcements of WTO Dispute Resolution Cases Matter? Evidence from the Rare Earth Elements Market (April 23, 2018). Energy Economics, Vol. 73, 1-23. Available at SSRN: https://ssrn.com/abstract=2953402 or http://dx.doi.org/10.2139/ssrn.2953402

Juliane Proelss

Concordia University, Quebec ( email )

1455 de Maisonneuve Blvd. W.
Montreal, Quebec H3G 1MB
Canada

Trier University of Applied Sciences ( email )

Scheidershof
Trier, 54293
Germany

Denis Schweizer (Contact Author)

Concordia University ( email )

1455 de Maisonneuve Blvd. W.
Montreal, Quebec H3G 1M8
Canada
+1 (514) 848-2424 ext. 2926 (Phone)
+1 (514) 848-4500 (Fax)

HOME PAGE: http://www.concordia.ca/jmsb/faculty/denis-schweizer.html

Volker Seiler

Xi'an Jiaotong-Liverpool University ( email )

8 Chongwen Road
Suzhou Industrial Park
Suzhou, Jiangsu 215123
China

University of Paderborn ( email )

Warburger Str. 100
Paderborn, D-33098
Germany

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