Graph 1.0. A graph illustrating the market movement of RIO TINO and ASX200
Graph 2.0 a graph of monthly changes to the prices of RIO TINO and ASX200
Table 1.0 performance statistics based on monthly returns of RIO TINO and ASX200
Rio Tinto PLC S&P/ASX 200
Average Monthly Returns -0.001473307 0.001842629
Standard deviation of Monthly Returns 0.081247015 0.036962566
Maximum Monthly Returns 0.217600107 0.072219726
Minimum Monthly Return -0.240268304 -0.08636303
Risk Ratio -55.14601506 20.05968603
The ‘European sovereign debt crisis’ started at the end of 2009 caused by various factors such as transfer of private debt emanating from property bubble to the sovereign debt, and structure of the Eurozone as the currency union without fiscal union. (Lane, 2012). The crisis had European integration and international economic significance affecting not only the European countries but also the oversea countries including Australia (Beirne & Fratzscher, 2013). Australian economy inevitably suffered the spillover effects from this debt crises, despite the assurance of the government that the country is not likely to suffer any effect due to few direct trade link with the Eurozone, resilient banking system and strong government finances (Gärtner, Griesbach & Jung, 2011). Australian economy suffered the consequences of the European downturn through a slowdown of the Asian economies (where countries like Indian and China have strong trade link with Australia and Europe) the higher borrowing costs for the Australian banks (Arezki, Candelon & Sy, 2011). This is evident in the Australian currency that lost slightly in European trade in different dates such as the on Friday following Greece exit vote (where it lost by one cent) (Selvaraj, 2015).
Australian stock market took a hit from the crises (Young & Semmler, 2011). As illustrated in graph 1.0, benchmark ASX 200 index, was trading at $4569 at the beginning of 2010, which is lower than $4870 of 2009. Similarly, the share price of RIO TINO was $ 2449.661 at the beginning of 2010 which represented an 8.5% loss from December 2009 price of $2679.687. Eurozone crises led to a loss in various industries in Australia, especially the iron core and mining industry (where RIO TINO operates), where the price of the iron core in China (which is the main market for Australian ore) fell by about 6% (Cummings & Wright, 2015). As a metal and mining company RIO TINO revenue was mainly affected by the crises and so did the investors’ expectations, which led to high level of volatility of the company’s stock (Broto & Perez-Quiros, 2015). In the face of European turmoil, the Australian local investors suffered the blunt, given that the stock market reacts to the information available (efficient market theory), and according to Kim, Salem and Wu (2015) the markets reacts more vigorously to the negative news than it reacts to the positive news. In 2011, as shown in graph 2.0, the crises worsened with some countries taking austerity measure and Greece voting to exit from Europe. The effect is illustrated by returns volatility of the RIO TINO stock which was higher than that of the market benchmark (ASX 200).
The integration of global economies, especially the integration between Asian economy and European and Asian and Australian, played a critical role in Australian suffering the spillover effects of the Eurozone crises (Stracca, 2015). The Australian stock market has been slightly volatile over the five years characterizing Eurozone Crises as shown in Graph 2.0 where the returns over the period both for the market benchmark and RIO TINO changed variably in different months. On average they were characteristically low, as shown in Table 1.0 with that of RIO TINO being -0.001473307 while that of the ASX200 being 0.001842629. The standard deviation was slightly high for the stock market as illustrated in Table 1.0 with RIO TINO having a standard deviation of 0.081247015 and ASX having 0.036962566. This shows that the market was relatively volatile in the period with single stock exp