Investor response to a natural disaster: Evidence from Japan's 2011 earthquake

•We examine non-normal investor behavior around the 9.0 Japanese earthquake in 2011.•Most of the loss in the stock market occurred immediately after the earthquake.•Domestic individual investors needed liquidity and become net sellers.•Foreign investors became extremely active in the Japanese stock markets.•Foreign investors appear to have stabilized and supported the financial markets.

Japan's most powerful known earthquake struck at 2:46 p.m. on Friday, March 11, 2011. We study the unusual trading behaviors of individual and foreign investors in Japan during the aftermath of this natural disaster. Individual investors typically show contrarian trading patterns, so the sharp downturn in the Nikkei should cause positive net purchases. Instead, purchases were significantly less than sales in the week after the earthquake. Foreign investors typically show positive feedback and momentum trading patterns. However, in the week after the earthquake, they seemed to have stabilized the Japanese stock markets by dramatically increasing their trading activity and net purchases.