Terrorism and stock market development: Causality evidence from Pakistan

Journal of Financial Crime 01/2013; 20(1):116-128. DOI: 10.1108/13590791311287364


Purpose– The aim of this paper is to explore the relationship between terrorist activities in Pakistan and the stock market development.

Design/methodology/approach– Using Terrorism Impact Factor (TIF), a unique score developed for this paper, an insight is provided into the causal relationship that exists between terrorism and Karachi Stock Exchange (KSE) index. Quantitative significance of the impact of terrorist activities on stock index is also discussed in the paper.

Findings– Through the empirics of the study, it is analyzed that terrorism negatively impacts stock market returns in the long run; whereas no significant relationship between stock market returns and terrorism is estimated in the short run.

Research limitations/implications– A potential limitation of the study was the constraint related to the available yearly economic growth and other economic variables’ data. The TIF created for the study was based on the terrorist activities from 2001 to mid-2011 on an incident-to-incident basis. A yearly measure would have provided 11 data points for the study, which are considered insufficient for econometric analysis.

Practical implications– It is recommended that governments pay particular attention to economic recovery in the aftermath of terrorist attacks. Policies aimed at combating terrorism must be the priority of the government, so that its harm can be reduced, if not exterminated. Social implications– Terrorism, with its all kinds of impacts, affects the society and its activities and therefore must be eliminated if an economy needs to prosper.

Originality/value– This study envisions the overall impact of terrorist activities, not just a single activity, on the health of the economy. For studying this impact, a Terrorism Impact Factor (TIF) scale has been developed for this study, based on the impact of each terrorist activity in the country.

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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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    ABSTRACT: This paper investigated the impact of prolonged terrorist activities on stock prices of different sectors listed in Karachi Stock Exchange by using newly developed terrorism impact factor index with lingering effect (TIFL) and monthly time series data from 2002(Jan) to 2011(Dec). Johansen and Jeuselius cointegration revealed long run relationship between terrorism and stock price. Normalized cointegration vectors are used to test the effect of terrorism on stock price. Results demonstrated signicantly mixed positive and negative impact of prolonged terrorism on stock prices of different sectors and have shown that market has not become insensitive to the prolonged terrorist attacks.