Non-Systematic Weather Risk in Emerging Markets
Observational StudyReview
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.
Picture this
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.
What the evidence says
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.
- Who was studied
- N = 1,479 small agricultural firms in Andhra Pradesh, India.
- How
- Empirical correlation analysis between local Indian monsoon rainfall shocks and global financial asset market returns.
What to do
Structure international reinsurance contracts for local weather indices to leverage global market decorrelation and reduce capital holding costs for emerging market agricultural insurers.
From the source
"Rainfall is cited as the most important source of risk by 89% of our sample. These local rainfall shocks are, to a first approximation, non-systematic: they are approximately uncorrelated with global aggregate asset returns."
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