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Terrorist attacks and investor risk preference: Evidence from mutual fund flows

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  • Wang, Albert Y.
  • Young, Michael

Abstract

Using a comprehensive list of terrorist attacks over three decades, we find that aggregate investor risk aversion inversely relates to terrorist activity in the United States. A one standard deviation increase in the number of attacks each month leads to a $75.09 million drop in aggregate flows to equity funds and a $56.81 million increase to government bond funds. Tests on alternative channels further suggest that the shift in aggregate risk aversion is driven mainly by an emotional shock rather than changes in wealth or the outside environment. We also investigate possible alternate explanations for reduced flows to risky assets. Our evidence is consistent with a fear-induced increase in aggregate risk aversion.

Suggested Citation

  • Wang, Albert Y. & Young, Michael, 2020. "Terrorist attacks and investor risk preference: Evidence from mutual fund flows," Journal of Financial Economics, Elsevier, vol. 137(2), pages 491-514.
    • Handle: RePEc:eee:jfinec:v:137:y:2020:i:2:p:491-514
    DOI: 10.1016/j.jfineco.2020.02.008
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    More about this item

    Keywords

    Terrorism; Risk preference; Risk aversion; Visceral emotions; Mutual fund flows;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • H56 - Public Economics - - National Government Expenditures and Related Policies - - - National Security and War

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