Article

The price of terror: The effects of terrorism on stock market returns and volatility

University of Rome, Tor Vergata, Italy
Economics Letters (Impact Factor: 0.45). 12/2008; 101(3):164-167. DOI: 10.1016/j.econlet.2008.07.007

ABSTRACT In this paper we investigate the effects of terrorism on the financial markets. Evidence from six different financial markets shows that terror has a significant impact on both stock markets and the stock market volatility, and the magnitude of these effects are larger in emerging markets.

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    • "Terrorist activities directly influence the sentiments of investors and thus lead towards downturn of stock market [19]. This is because the investors become defensive in the phase of uncertainty caused by such events and it results in huge price fluctuation at stock exchange [20]. "
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    ABSTRACT: This study was undertaken to assess the impact of terrorism on major stock exchange of Pakistan i.e. Karachi Stock Exchange.The impact of most pronounced terrorist attacks of the last decade i.e. Assassination of ex Prime Minister Benazir Bhutto, Attack on Marriott Hotel Islamabad and Attack in Darra Adam khel 2010was studied on KSE 100 index. Event study methodology was used toanalyze the data. The results of study showed that the Marriott hotel attack produced the negative impact throughout estimation windows, ex Prime Minister Benazir Bhutto assassination attack resulted in sharp decline followed by immediate recovery of KSE 100 index, while there was a little negative impact of DarraAdamkhel attack on KSE 100 index which too lasted for a day or two. The results also highlighted that the venue and the target of attack are the important contributors in signifying the impact of attack on stock market.
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    • "In order to differentiate between the magnitude and geographical location of an act of terror, we construct a daily terrorism intensity index (Eckstein and Tsiddon, 2004; Peren Arin et al., 2008), such that T ER i,t = ln(1 + # attacks i,t + # fatalities i,t + # injured i,t ), (1) where i represents the region the attack took place in and t is the day on which the attack is placed. The inputs are the number of attacks, fatalities and injuries as reported by the GTD. 5 The regions closely follow the grouping 3 According to the GTD, terrorist attacks have to be aimed at 'attaining a political, economic, religious, or social goal,' there must be 'evidence of an intention to coerce, intimidate, or convey some other message to a larger audience (or audiences) than the immediate victims,' and the event must be 'outside the context of legitimate warfare activities' (Study of Terrorism and Responses to Terrorism (START), 2011). "
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    ABSTRACT: We record the existence of an availability heuristic that is reflected in disaster myopia of U.S. investors and exists prior to the attacks of 9/11. We argue that this is fueled by an aggregate experience hypothesis effect, resulting in a pronounced increase in the sensitivity of U.S. stock prices to terrorist attacks on foreign soil. After 9/11, stock prices react proportionally to the size of an attack and the share of FDI stock held in the region by the sector in which firms operate. This effect, non-existent prior to 2002, has become increasingly strong in recent years.
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    • "In order to differentiate between the magnitude and geographical location of an act of terror, we construct a daily terrorism intensity index (Eckstein and Tsiddon, 2004; Peren Arin et al., 2008), such that T ER i,t = ln(1 + # attacks i,t + # fatalities i,t + # injured i,t ), (1) where i represents the region the attack took place in and t is the day on which the attack is placed. The inputs are the number of attacks, fatalities and injuries as reported by the GTD. 5 The regions closely follow the grouping 3 According to the GTD, terrorist attacks have to be aimed at 'attaining a political, economic, religious, or social goal,' there must be 'evidence of an intention to coerce, intimidate, or convey some other message to a larger audience (or audiences) than the immediate victims,' and the event must be 'outside the context of legitimate warfare activities' (Study of Terrorism and Responses to Terrorism (START), 2011). "
    [Show abstract] [Hide abstract]
    ABSTRACT: We record the existence of an availability heuristic that is reflected in disaster myopia of U.S. investors and exists prior to the attacks of 9/11. We argue that this is fueled by an aggregate experience hypothesis effect, resulting in a pronounced increase in the sensitivity of U.S. stock prices to terrorist attacks on foreign soil. After 9/11, stock prices react proportionally to the size of an attack and the share of FDI stock held in the region by the sector in which firms operate. This effect, non-existent prior to 2002, has become increasingly strong in recent years.
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