Non-Systematic Weather Risk in Emerging Markets

In Simple Words

Imagine a localized hail storm that destroys a single neighborhood's roofs; while the local damage is total for the homeowners, the global stock market doesn't feel a ripple, making the disaster locally devastating but globally diversifiable.

Research question

Agricultural producers in developing economies face severe weather shocks that are locally catastrophic yet unhedged by standard financial markets, despite being statistically uncorrelated with global aggregate financial asset returns.

Participants

N = 1,479 small agricultural firms in Andhra Pradesh, India.

Study Design

Empirical correlation analysis between local Indian monsoon rainfall shocks and global financial asset market returns.

Results

Local monsoon rainfall variation was identified as the primary income risk by 89% of rural households, yet these rainfall shocks are approximately uncorrelated with global aggregate asset returns.

Takeaway

Structure international reinsurance contracts for local weather indices to leverage global market decorrelation and reduce capital holding costs for emerging market agricultural insurers.

Related findings

• Anticipatory Human Capital and Child Nutrition Investment →Development

  Imagine planting two types of fruit trees in a garden where fruit tree A sells for high prices in the future market while tree B sells for nothing. Gardeners naturally water, fertilize, and prune tree A far more diligently long before it bears fruit because they anticipate harvesting a lucrative crop years down the road.

• Asset Accumulation and Savings Persistence →Development

  Think of a short-term public works program like a heavy rainstorm over a dry farm. If a farmer lets the water run off, the soil dries up as soon as the storm ends.

• Asset Wealth and Cash Liquidity Decoupling →Development

  Imagine a rancher who owns ten valuable oxen but has no paper cash in their wallet. Even though they are wealthy on paper, they purchase smaller quantities of commercial seed because selling a working ox to buy a bag of seed is impractical.

• Baseline Investment Intention Realization in Microenterprises →Development

  Imagine telling a friend that if you get $100, you will buy a specific power drill for your workshop. When given the $100, you immediately go out and buy that exact drill.