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The impact of terrorism on financial markets: An empirical study

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  • Chesney, Marc
  • Reshetar, Ganna
  • Karaman, Mustafa
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    Abstract

    The main focus of this paper is to study empirically the impact of terrorism on the behavior of stock, bond and commodity markets. We consider terrorist events that took place in 25 countries over an 11-year time period and implement our analysis using different methods: an event-study approach, a non-parametric methodology, and a filtered GARCH-EVT approach. In addition, we compare the effect of terrorist attacks on financial markets with the impact of other extreme events such as financial crashes and natural catastrophes. The results of our analysis show that a non-parametric approach is the most appropriate method among the three for analyzing the impact of terrorism on financial markets. We demonstrate the robustness of this method when interest rates, equity market integration, spillover and contemporaneous effects are controlled. We show how the results of this approach can be used for investors' portfolio diversification strategies against terrorism risk.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 35 (2011)
    Issue (Month): 2 (February)
    Pages: 253-267

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    Handle: RePEc:eee:jbfina:v:35:y:2011:i:2:p:253-267

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    Web page: http://www.elsevier.com/locate/jbf

    Related research

    Keywords: Terrorism Financial markets Event-study Non-parametric methodology Filtered GARCH-EVT approach Portfolio diversification;

    References

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    1. Oana M. Nedelescu & R. B. Johnston, 2005. "The Impact of Terrorismon Financial Markets," IMF Working Papers 05/60, International Monetary Fund.
    2. Wang, Jia & Meric, Gulser & Liu, Zugang & Meric, Ilhan, 2009. "Stock market crashes, firm characteristics, and stock returns," Journal of Banking & Finance, Elsevier, vol. 33(9), pages 1563-1574, September.
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    Cited by:
    1. Iatridis, George, 2012. "Terrorist attacks and company financial numbers: Evidence on earnings management and value relevance from Madrid, London and Istanbul," Research in International Business and Finance, Elsevier, vol. 26(2), pages 204-220.
    2. Christos Kollias & Stephanos Papadamou, 2012. "Rogue State Behavior and Markets: The Financial Fallout of North Korean Nuclear Tests," Economics of Security Working Paper Series 67, DIW Berlin, German Institute for Economic Research.
    3. Charles, Amélie & Darné, Olivier, 2014. "Large shocks in the volatility of the Dow Jones Industrial Average index: 1928–2013," Journal of Banking & Finance, Elsevier, vol. 43(C), pages 188-199.
    4. Christos Kollias & Stephanos Papadamou & Costas Siriopoulos, 2013. "European Markets’ Reactions to Exogenous Shocks: A High Frequency Data Analysis of the 2005 London Bombings," International Journal of Financial Studies, MDPI, Open Access Journal, vol. 1(4), pages 154-167, November.
    5. Peresetsky, A. A., 2011. "What determines the behavior of the Russian stock market," MPRA Paper 41508, University Library of Munich, Germany.
    6. Rubin, Ofir D. & Ihle, Rico & Kachel, Yael & Goodwin, Barry K., 2013. "The impact of violent political conflict on commodity prices: The Israeli food market," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 150961, Agricultural and Applied Economics Association.
    7. Kollias, Christos & Kyrtsou, Catherine & Papadamou, Stephanos, 2013. "The effects of terrorism and war on the oil price–stock index relationship," Energy Economics, Elsevier, vol. 40(C), pages 743-752.
    8. Essaddam, Naceur & Karagianis, John M., 2014. "Terrorism, country attributes, and the volatility of stock returns," Research in International Business and Finance, Elsevier, vol. 31(C), pages 87-100.
    9. Christos Kollias & Stephanos Papadamou & Vangelis Arvanitis, 2013. "Symposium - Does Terrorism Affect the Stock-Bond Covariance? Evidence from European Countries," Southern Economic Journal, Southern Economic Association, vol. 79(4), pages 832-848, April.
    10. Ramiah, Vikash & Martin, Belinda & Moosa, Imad, 2013. "How does the stock market react to the announcement of green policies?," Journal of Banking & Finance, Elsevier, vol. 37(5), pages 1747-1758.
    11. Chau, Frankie & Deesomsak, Rataporn & Wang, Jun, 2014. "Political uncertainty and stock market volatility in the Middle East and North African (MENA) countries," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 28(C), pages 1-19.

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