How scary are food scares?: Evidence from animal disease outbreaks

Abnormal volatility levels have persisted for an extended period in livestock markets. Some of the most significant shocks have come from animal disease outbreaks, such as Bovine Spongiform Encephalopathy (BSE) and the H1N1 flu. Although there has been considerable research to examine the impact of disease outbreaks on cattle markets, these studies have not extensively investigated the volatility component of financial data. Since it has been shown that futures prices exhibit time-varying variance, investigating volatility of livestock futures prices in response to BSE and H1N1 will reveal the resilience of commodity markets during large food scare outbreaks. Using a regression framework to measure abnormal returns and variances as regression coefficients, we find that livestock futures markets are affected during animal disease outbreaks with returns decreasing and the variance increasing, on average, during these events. In certain cases, outbreaks impact the volatility of a substitute commodity.