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

Highlights: • Rare earth elements (REEs) are important for green- and high-technology products. • Announcements of WTO dispute resolution cases have the power to change market dynamics. • The price-generating process of REEs changes after the announcement. • Stock price informativeness of companies in the REEs industry increases after the announcement. • Model uncertainty for option pricing models decreases after the announcement. - 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.