Do World Trade Organization rulings really matter? Evidence from the rare earth elements market

Rare earth elements (REEs) have gained increasing attention recently for several key reasons: 1) they are of paramount and strategic importance for a variety of green- and high-technology products, such as hybrid and electric cars, wind energy turbines, photovoltaic cells, mobile phones, hard and CD drives, and permanent magnets, 2) they are relatively scarce as concentration is generelly low, 3) they frequently exhibit high price fluctuations, 4) China holds a quasi-monopoly on their mining as well above 80% of global REE mine production and more than 50% of worldwide REE reserves are located in China, and 5) China’s REE policy of setting export quotas, 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 can influence governmental changes in existing policies. We find empirical support for this notion, because REE prices exhibit a structural break around the announcement of a 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 the stock price informativeness of companies in the REE industry increases after such an announcement, reflecting more firm-specific than marketwide information and less governmental influence. Finally, we show that the model uncertainty for option pricing models decreases, which we measure by the lower pricing differences among the option pricing models of Black-Scholes (1973), Duan (1995), and Heston-Nandi (2000).