Login | Register

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


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

Proelss, Juliane ORCID: https://orcid.org/0000-0002-9467-8220, Schweizer, Denis ORCID: https://orcid.org/0000-0001-9115-1178 and Seiler, Volker (2018) Do Announcements of WTO Dispute Resolution Cases Matter? Evidence from the Rare Earth Elements Market. Energy Economics . ISSN 01409883 (In Press)

Text (application/pdf)
Proelss.pdf - Accepted Version
Restricted to Repository staff only until 10 May 2020.
Available under License Spectrum Terms of Access.

Official URL: http://dx.doi.org/10.1016/j.eneco.2018.05.004


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.

Divisions:Concordia University > John Molson School of Business > Finance
Item Type:Article
Authors:Proelss, Juliane and Schweizer, Denis and Seiler, Volker
Journal or Publication:Energy Economics
Digital Object Identifier (DOI):10.1016/j.eneco.2018.05.004
Keywords:Market Efficiency; Rare Earth Elements; Stock Price Informativeness; Structural Break Test; Variance Ratio Test; World Trade Organization (WTO)
ID Code:983856
Deposited By: ALINE SOREL
Deposited On:11 May 2018 13:03
Last Modified:11 May 2018 13:03


S.S. Alexander Price movements in speculative markets: Trends or random walks Industrial Management Review., 2 (2) (1961), pp. 7–26

R. Aloui, M.S. Ben Aissa, S. Hammoudeh, D.K. Nguyen Dependence and extreme dependence of crude oil and natural gas prices with applications to risk managementEnergy Economics., 42 (2014), pp. 332–342

D.W.K. Andrews Heteroskedasticity and autocorrelation consistent covariance matrix estimation Econometrica., 59 (3) (1991), pp. 817–858

D.W.K. Andrews, J.C. Monahan An improved heteroscedasticity and autocorrelation consistent covariance matrix estimator Econometrica., 60 (4) (1992), pp. 953–966

APS Panel on Public Affairs/The Materials Research Society Energy critical elements: Securing materials for emerging technologies American Physical Society, Washington (2011) https://www.aps.org/policy/reports/popa-reports/upload/elementsreport.pdf

G. Athanasiou, I. Karafyllis, S. Kotsios Price stabilization using buffer stocks Journal of Economic Dynamics and Control., 32 (4) (2008), pp. 1212–1235

T.O. Awokuse, A. Chopra, D.A. Bessler Structural change and international stock market interdependence: Evidence from Asian emerging markets Economic Modelling., 26 (3) (2009), pp. 549–559

O.F. Ayadi, C.S. Pyun An application of variance ratio test to the Korean securities market Journal of Banking and Finance., 18 (4) (1994), pp. 643–658

J. Bai, P. Perron Estimating and testing linear models with multiple structural changes Econometrica., 66 (1) (1998), pp. 47–78

J. Bai, P. Perron Computation and analysis of multiple structural change models Journal of Applied Econometrics., 18 (1) (2003), pp. 1–22

J. Bai, P. Perron Critical values for multiple structural change tests Econometrics Journal., 6 (1) (2003), pp. 72–78

C.-E. Bai, Q. Liu, F.M. Song, J. Zhang Corporate governance and market valuation in China Journal of Comparative Economics., 32 (4) (2004), pp. 599–616

V. Bailey Grasso Rare earth elements in national defense: Background, oversight issues, and options for congress Congressional Research Service Report, R41744 (2013) http://www.fas.org/sgp/crs/natsec/R41744.pdf

J.A. Batten, C. Ciner, B.M. Lucey The macroeconomic determinants of volatility in precious metals markets Resources Policy., 35 (2) (2010), pp. 65–71

D.G. Baur Gold mining companies and the price of gold Review of Financial Economics., 23 (4) (2014), pp. 174–181

M. Bekhar Trade skirmishes safeguards: A theory of the WTO dispute settlement process Journal of International Economics., 82 (1) (2010), pp. 35–48

K. Binnemans, P.T. Jones, B. Blanpain, T. Van Greven, Y. Yang, A. Walton, M. Buchert Recycling of rare earths: A critical review Journal of Cleaner Production., 51 (2013), pp. 1–22

F. Black, M. Scholes The pricing of options and corporate liabilities Journal of Political Economy., 81 (3) (1973), pp. 637–645

E.W. Bond, J. Trachtman China-rare earths: Export restrictions and the limits of textual interpretation World Trade Review., 15 (2) (2016), pp. 189–209

M.M. Boyer, D. Filion Common and fundamental factors in stock returns of Canadian oil and gas companies Energy Economics., 29 (3) (2007), pp. 428–453

J. Casassus, P. Collin-Dufresne Stochastic convenience yield implied from commodity futures and interest rates Journal of Finance., 60 (5) (2005), pp. 2283–2331

K. Chan, A. Hameed Stock price synchronicity and analyst coverage in emerging markets Journal of Financial Economics., 80 (1) (2006), pp. 115–147

A. Charles, O. Darné Variance-ratio tests of random walk: An overview Journal of Economic Surveys., 23 (3) (2009), pp. 503–527

G. Chen, M. Firth, D.N. Gao, O.M. Rui Ownership structure, corporate governance, and fraud: Evidence from China Journal of Corporate Finance., 12 (3) (2006), pp. 424–448

Q. Chen, I. Goldstein, W. Jiang Price informativeness and investment sensitivity to stock price Review of Financial Studies., 20 (3) (2007), pp. 619–650

J. Chen, D. Cumming, W. Hou, E. Lee Executive integrity, audit opinion, and fraud in Chinese listed firms Emerging Markets Review., 15 (2013), pp. 72–91

J. Chen, D. Cumming, W. Hou, E. Lee Does the external monitoring effect of financial analysts deter corporate fraud in China? Journal of Business Ethics., 134 (4) (2016), pp. 727–742

H. Choi, H. Varian Predicting the present with Google Trends
Google Inc, Working Paper (2009) https://static.googleusercontent.com/media/www.google.com/de//googleblogs/pdfs/google_predicting_the_present.pdf

H. Choi, H. Varian Predicting the present with Google Trends Economic Record., 88 (s1) (2012), pp. 2–9

K.V. Chow, K.C. Denning A simple multiple variance ratio test Journal of Econometrics., 58 (3) (1993), pp. 385–401

J.H. Cochrane How big is the random walk in GNP? Journal of Political Economy., 96 (5) (1988), pp. 893–920

J. Conrad The price effect of option introductionJournal of Finance., 44 (2) (1989), pp. 487–498

D. Cumming, W. Hou Valuation of restricted shares by conflicting shareholders in the Split Share Structure Reform European Journal of Finance., 20 (7-9) (2014), pp. 778–802

D. Cumming, R. Dixon, W. Hou, E. LeeMedia coverage and foreign share discount puzzle in China European Journal of Finance., 22 (4-6) (2016), pp. 393–412

B.R. Danielsen, B.F. Van Ness, R.S. Warr Reassessing the impact of option introductions on market quality: A less restrictive test for event-date effects Journal of Financial and Quantitative Analysis., 42 (4) (2007), pp. 1041–1062

W.J. Davey The WTO dispute settlement mechanism Working Paper https://papers.ssrn.com/sol3/papers.cfm?abstract_id=419943 (2003)

M.A. Desai, J.R. Hines Jr. Market reactions to export subsidies Journal of International Economics., 74 (2) (2008), pp. 459–474

J. Detemple, P. Jorion Option listing and stock returns: An empirical analysis Journal of Banking & Finance., 14 (4) (1990), pp. 781–801

J.-C. Duan The GARCH option pricing model Mathematical Finance., 5 (1) (1995), pp. 13–32

European Commission EU challenges China’s rare earth export restrictions. European Commission – Press Release UP/12/239 http://europa.eu/rapid/press-release_IP-12- 239_en.htm (2012)

R. Faff, H. Chan A multifactor model of gold industry stock returns: Evidence from the Australian equity market Applied Financial Economics., 8 (1) (1998), pp. 21–28

R. Gibson, E.S. Schwartz Stochastic convenience yield and the pricing of oil contingent claims Journal of Financel., 45 (3) (1990), pp. 959–976

L.A. Gil-Alana, O.O.S. Yaya The relationship between oil prices and the Nigerian stock market An analysis based on fractional integration and cointegration. Energy Economics., 46 (2014), pp. 328–333

Goonan, T.G., 2011. Rare earth elements – end use and recyclability. U.S. Geological Survey Scientific Investigations Report 2011 – 5094. http://pubs.usgs.gov/sir/2011/5094/ (accessed 27 March 2018).

F.A. Gul, J.B. Kim, A.A. Qiu Ownership concentration, foreign shareholding, audit quality, and stock price synchronicity: Evidence from China Journal of Financial Economics., 95 (3) (2010), pp. 425–442

E. Haugom, H. Langeland, P. Molnár, S. WestgaardForecasting volatility of the U.S. oil market Journal of Banking and Finance., 47 (2014), pp. 1–14

R. Herrera, A. Rodriguez, G. Pino Modeling and forecasting extreme commodity prices: A Markov-Switching based extreme value model Energy Economics., 63 (2017), pp. 129–143

S.L. Heston, S. Nandi A closed-form GARCH option valuation model Review of Financial Studies., 13 (3) (2000), pp. 585–625

M. Humphries Rare earth elements: The global supply chain Congressional Research Service Report, R41347 (2013) http://www.fas.org/sgp/crs/natsec/R41347.pdf

J.-C. Hung Deregulation and liberalization of the Chinese stock market and the improvement of market efficiency Quarterly Review of Economics and Finance., 49 (3) (2009), pp. 843–857

A. Ibáñez, F. Zapatero Monte Carlo valuation of American options through computation of the optimal exercise frontierJournal of Financial and Quantitative Analysis., 39 (2) (2004), pp. 253–275

Jackson, W.D., Christiansen, G., 1993. International strategic minerals inventory summary report – rare earth oxides. U.S. Geological Survey Circular 930 N.http://pubs.usgs.gov/circ/1993/0930n/report.pdf (accessed 27 March 2018).

M. Jacob, S. Johan, D. Schweizer, F. ZhanCorporate finance and governance implications from the removal of government support programs Journal of Banking and Finance., 63 (2016), pp. 35–47

Jin, L., Myers, S.C., 2006. R2 around the world: New theory and new tests. Journal of Financial Economics. 79 (2), 257-292.

M.G. Kendall The analysis of economic time-series – Part I: Prices. Journal of the Royal Statistical Society Series A (General)., 116 (1) (1953), pp. 11–25

J.H. Kim Wild bootstrapping variance ratio tests Economics Letters., 92 (1) (2006), pp. 38–43

Hoque, H.A.A.B, Kim, J.H., Pyun, C.S., 2007. A comparison of variance ratio tests of random walk: A case of Asian emerging stock markets. International Review of Economics & Finance. 16 (4), 488-502.

N. Koch Tail events: A new approach to understanding extreme energy commodity prices Energy Economics., 43 (2014), pp. 195–205

R. Kumar, A. Sarin, K. Shastri The impact of options trading on the market quality of the underlying security: An empirical analysis Journal of Finance., 53 (2) (1998), pp. 717–732

M.H. Kutner, C.J. Nachtsheim, J. Neter, W. Li Applied linear statistical models (fifth ed.)McGraw-Hill, New York (2005)

S. Lenway, K. Rehbein, L. Starks The impact of protectionism on firm wealth: The experience of the steel industry Southern Economic Journal., 56 (4) (1990), pp. 1079–1093

S. Lenway, R. Morck, B. Yeung Rent seeking, protectionism and innovation in the American steel industryThe Economic Journal., 106 (435) (1996), pp. 410–421

B.H. Liebman Safeguards, China, and the price of steel Review of World Economics., 142 (2) (2006), pp. 354–373

B.H. Liebman, K.M. Tomlin Steel safeguards and the welfare of U.S. steel firms and downstream consumers of steel: A shareholder wealth perspective Canadian Journal of Economics., 40 (3) (2007), pp. 812–842

B.H. Liebman, K.M. Tomlin Safeguards and retaliatory threatsJournal of Law & Economics., 51 (2) (2008), pp. 351–376

B.H. Liebman, K.M. Tomlin World Trade Organization sanctions, implementation, and retaliation Empirical Economics., 48 (2) (2015), pp. 715–745

Liu, Q., Lu, Z. (J.), 2007. Corporate governance and earnings management in the Chinese listed companies: A tunneling perspective. Journal of Corporate Finance. 13 (5), 881-906.

C.Y. Liu, J. He A variance-ratio test of random walks in foreign exchange ratesJournal of Finance., 46 (2) (1991), pp. 773–785

A.W. Lo, A.C. MacKinlay Stock market prices do not follow random walks: Evidence from a simple specification test Review of Financial Studies., 1 (1) (1988), pp. 41–66

Long, K.R., Van Gosen, B.S., Foley, N.K., Cordier, D., 2010. The principal rare earth elements deposits of the United States – A summary of domestic deposits and a global perspective. U.S. Geological Survey Scientific Investigations Report 2010 – 5220. http://pubs.usgs.gov/sir/2010/5220/ (accessed 27 March 2018).

V. Marimoutou, B. Raggad, A. Trabelsi Extreme value theory and value at risk: Application to oil market Energy Economics., 31 (4) (2009), pp. 519–530

Massachusetts Institute of Technology’s Energy Initiative/APS Panel on Public Affairs/The Materials Research Society Critical elements for new energy technologies An MIT Energy Initiative Workshop Report http://energy.mit.edu/publication/critical-elements-for-new-energy-technologies/ (2010)

D. McCarty, S. Casey Bankruptcy as rare-earth prices drop Bloomberg http://www.bloomberg.com/news/articles/2015-06-25/molycorp-files-for-bankruptcy-proposes-debt-restructuring-plan (2015)

J.W. Miller, A. Zheng Molycorp files for bankruptcy protection Wall Street Journal http://www.wsj.com/articles/SB10907564710791284872504581069270334872848 (2015)

R. Morck, B. Yeung, W. Yu The information content of stock markets: Why do emerging markets have synchronous stock price movements Journal of Financial Economics., 58 (1-2) (2000), pp. 215–260

W.M. Morrison, R. Tang China’s rare earth industry and export regime: Economic and trade implications for the United States. Congressional Research Service Report (2012), Article R42510 http://www.fas.org/sgp/crs/row/R42510.pdf

M. Müller, D. Schweizer, V. Seiler Wealth effects of rare earth prices and China’s rare earth elements policy Journal of Business Ethics., 138 (4) (2016), pp. 627–648

W.K. Newey, K.D. West A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix Econometrica., 55 (3) (1987), pp. 703–708

Bloomberg News, 2014. Chinese exchange starts rare earths trading trial today. http://www.bloomberg.com/news/2014-03-27/chinese-exchange-starts-rare-earths-trading-trial-today.html (accessed 27 March 2018).

J.D. Piotroski, D.T. Roulstone The influence of analysts, institutional investors, and insiders on the incorporation of market, industry, and firm-specific information into stock prices The Acccounting Review., 79 (4) (2004), pp. 1119–1151

D.N. Politis, J.P. Romano Bias-corrected nonparametric spectral estimation Journal of Time Series Analysis., 16 (1) (1995), pp. 67–104

D.N. Politis, H. White Automatic block-length selection for the dependent bootstrap Econometric Reviews., 23 (1) (2004), pp. 53–70

J.M. Poterba, L.H. Summers Mean reversion in stock prices: Evidence and implications Journal of Financial Economics., 22 (1) (1988), pp. 27–59

Rare earths miner Molycorp files for Chapter 11 bankruptcy. http://www.reuters.com/article/2015/06/25/us-molycorp-bankruptcy-idUSKBN0P50QS20150625 (accessed 27 March 2018).

B.R. Routledge, D.J. Seppi, C.S. Spatt Equilibrium forward curves for commodities Journal of Finance., 55 (3) (2000), pp. 1297–1338

T. Sattler, G. Spilker, T. Bernauer Does WTO dispute settlement enforce or inform? British Journal of Political Science., 44 (4) (2014), pp. 877–902

D. Schweizer, T.J. Walker, A. Zhang Do privately owned enterprises in China need political connections to issue corporate bonds? Working Paper https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2846730 (2017)

D. Schweizer, T. Walker, A. Zhang Cross-border acquisitions by Chinese enterprises: The benefits and disadvantages of political connection Journal of Corporate Finance, Forthcoming (2018)

China to add rare earths to the Shanghai Futures Exchange. http://investorintel.com/rare-earth-intel/china-plans-add-rare-earths-shanghai-futures-exchange/.

A. Shleifer, R.W. Vishny Politicians and firms Quarterly Journal of Economics., 109 (4) (1994), pp. 995–1025

D.J. Skinner Options markets and stock return volatility Journal of Financial Economics., 23 (1) (1989), pp. 61–78

B.M. Tabak, D.O. Cajueiro Are the crude oil markets becoming weakly efficient over time? A test for time-varying long-range dependence in prices and volatility Energy Economics., 29 (1) (2007), pp. 28–36

Y. Tan, X. Tian, X. Zhang, H. Zhao The real effects of privatization: Evidence from China’s split share structure reform Working Paper https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2481838 (2015)

TMR (Technology Metals Research), 2014. The WTO panel report on Chinese rare earth exports. http://www.techmetalsresearch.com/the-wto-panel-report-on-chinese-rare-earth-exports/ (accessed 27 March 2018).

P. Tufano The determinants of stock price exposure: Financial engineering and the gold mining industry Journal of Finance., 53 (3) (1998), pp. 1015–1052

M. Urquhart, F. McGroarty Are stock markets really efficient? Evidence from the adaptive market hypothesis. International Review of Financial Analysis., 47 (2016), pp. 39–49

Van Gosen, B.S., Verplanck, P.L., Long, K.R., Gambogi, J., Seal, R.R. II, 2014. The rare-earth elements – Vital to modern technologies and lifestyles. U.S. Geological Survey Fact Sheet 2014 – 3078. http://pubs.usgs.gov/fs/2014/3078/ (accessed 27 March 2018).

Y.-J. Whang, J. Kim A multiple variance ratio test using subsampling Economics Letters., 79 (2) (2003), pp. 225–230

J.H. Wright Alternative variance-ratio tests using ranks and signs Journal of Business & Economic Statistics., 18 (1) (2000), pp. 1–9

WSJ, 2015. World news: China ends quotas on rare-earth exports. Wall Street Journal (Eastern Edition), 06 January 2015, A.6.

WTO (World Trade Organization), 2014a. China files notice of appeal in rare earth disputes. http://www.wto.org/english/news_e/news14_e/ds432_433apl_25apr14_e.htm (accessed 27 March 2018).

WTO (World Trade Organization) China – measures related to the exportation of rare earths, tungsten and molybdenum, dispute settlement: Dispute (2014), p. DS431 http://www.wto.org/english/tratop_e/dispu_e/cases_e/ds431_e.htm#bkmk431abr

WTO (World Trade Organization) China – measures related to the exportation of rare earths, tungsten, and molybdenum Reports of the Appellate Body http://wto.org/english/tratop_e/dispu_e/431_432_433abr_e.pdf (2014)

WTO (World Trade Organization) China – measures related to the exportation of rare earths, tungsten, and molybdenum Reports of the Panel http://www.wto.org/english/tratop_e/dispu_e/431_432_433r_e.pdf (2014)

WTO (World Trade Organization), 2014e. DSB adopts appellate body reports on China’s rare earths measures. http://www.wto.org/english/news_e/news14_e/dsb_29aug14_e.htm (accessed 27 March 2018).

WTO (World Trade Organization), 2014f. US appeals rare earth panel report. http://wto.org/english/news_e/news14_e/ds431apl_08apr14_e.htm (accessed 27 March 2018).

W. Wu, S.A. Johan, O.M. Rui Institutional investors, political connections, and the incidence of regulatory enforcement against corporate fraud Journal of Business Ethics., 134 (4) (2016), pp. 709–726

N. Xu, Q. Yuan, X. Jiang, K.C. Chan Founder’s political connections, second generation involvement, and family firm performance: Evidence from China Journal of Corporate Finance., 33 (2015), pp. 243–259
All items in Spectrum are protected by copyright, with all rights reserved. The use of items is governed by Spectrum's terms of access.

Repository Staff Only: item control page

Downloads per month over past year

Back to top Back to top