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Do announcements of WTO dispute resolution cases matter? Evidence from the rare earth elements market

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  • Proelss, Juliane
  • Schweizer, Denis
  • Seiler, Volker

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.

Suggested Citation

  • Proelss, Juliane & Schweizer, Denis & Seiler, Volker, 2018. "Do announcements of WTO dispute resolution cases matter? Evidence from the rare earth elements market," Energy Economics, Elsevier, vol. 73(C), pages 1-23.
    • Handle: RePEc:eee:eneeco:v:73:y:2018:i:c:p:1-23
    DOI: 10.1016/j.eneco.2018.05.004
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    Cited by:

    1. Seiler, Volker, 2024. "The relationship between Chinese and FOB prices of rare earth elements – Evidence in the time and frequency domain," The Quarterly Review of Economics and Finance, Elsevier, vol. 95(C), pages 160-179.
    2. Yufeng Chen & Biao Zheng, 2019. "What Happens after the Rare Earth Crisis: A Systematic Literature Review," Sustainability, MDPI, vol. 11(5), pages 1-26, March.
    3. Li, Zheng-Zheng & Meng, Qin & Zhang, Linling & Lobont, Oana-Ramona & Shen, Yijuan, 2023. "How do rare earth prices respond to economic and geopolitical factors?," Resources Policy, Elsevier, vol. 85(PA).
    4. Zhou, Mei-Jing & Huang, Jian-Bai & Chen, Jin-Yu, 2022. "Time and frequency spillovers between political risk and the stock returns of China's rare earths," Resources Policy, Elsevier, vol. 75(C).
    5. Zhe Chen & Zhongzhong Hu & Kai Li, 2021. "The spillover effect of trade policy along the value Chain: Evidence from China's rare earth‐related sectors," The World Economy, Wiley Blackwell, vol. 44(12), pages 3550-3582, December.
    6. Proelss, Juliane & Schweizer, Denis & Seiler, Volker, 2020. "The economic importance of rare earth elements volatility forecasts," International Review of Financial Analysis, Elsevier, vol. 71(C).
    7. Zhan, Feng & Proelss, Juliane & Schweizer, Denis, 2020. "China: From imitator to innovator?," Emerging Markets Review, Elsevier, vol. 42(C).
    8. Seiler, Volker, 2021. "China-to-FOB price transmission in the rare earth elements market and the end of Chinese export restrictions," Energy Economics, Elsevier, vol. 102(C).
    9. Reboredo, Juan C. & Ugolini, Andrea, 2020. "Price spillovers between rare earth stocks and financial markets," Resources Policy, Elsevier, vol. 66(C).
    10. Hau, Liya & Zhu, Huiming & Yu, Yang & Yu, Dongwei, 2022. "Time-frequency coherence and quantile causality between trade policy uncertainty and rare earth prices: Evidence from China and the US," Resources Policy, Elsevier, vol. 75(C).

    More about this item

    Keywords

    Market efficiency; Rare earth elements; Stock price informativeness; Structural break test; Variance ratio test; World Trade Organization (WTO);
    All these keywords.

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • Q02 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Commodity Market
    • Q38 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Government Policy (includes OPEC Policy)

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