Terrorism and stock market development: Causality evidence from Pakistan

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

ABSTRACT 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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