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

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