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The determinants of terrorist shocks' cross-market transmission

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Author Info

  • Konstantinos Drakos

Abstract

Purpose – The purpose of this paper is to explore the determinants of the cross-market transmission mechanism for terrorist shocks, focusing on two major terrorist events and 68 national stock markets. Design/methodology/approach – The paper generates daily abnormal returns from a three-factor world asset-pricing model. Abnormal returns are then regressed on proxies of three transmission mechanisms; a world integration channel, a bilateral integration channel, and a liquidity channel. Findings – The findings indicate that terrorism shocks are diffused cross-nationally in a non-uniform manner. This paper finds empirical support for all three channels when considered separately. The bilateral integration channel contains the highest explanatory power since it is found that a third country's trade linkages with the “ground-zero” country explain about 24 percent of the stock market reaction. A country's share in the world trade, a proxy for the world integration channel, is able to explain about 12 percent of abnormal-return variation, while the liquidity channel exhibits the lowest predictive power, with the value of stock trading explaining about 6 percent. A hybrid model, where proxies for all channels are included, shows that only the bilateral trade linkages with the “ground-zero” country are significant determinants of the stock market reaction. Practical implications – Provides evidence useful for portfolio management and authorities' assessment of terrorist shocks' impact on capital markets. Originality/value – It is the first study that investigates the determinants of cross-market transmission of terrorist shocks.

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Bibliographic Info

Article provided by Emerald Group Publishing in its journal Journal of Risk Finance.

Volume (Year): 11 (2010)
Issue (Month): 2 (February)
Pages: 147-163

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Handle: RePEc:eme:jrfpps:v:10:y:2010:i:2:p:147-163

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Related research

Keywords: Stock markets; Stock returns; Terrorism;

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References

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Citations

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Cited by:
  1. Michael Brzoska & Raphael Bossong & Eric van Um, 2011. "Security Economics in the European Context: Implications of the EUSECON Project," Economics of Security Working Paper Series 58, DIW Berlin, German Institute for Economic Research.
  2. repec:diw:diwdiw:diwepb14 is not listed on IDEAS
  3. Schneider, Friedrich, 2010. "The (Hidden) Financial Flows of Terrorist and Organized Crime Organizations: A Literature Review and Some Preliminary Empirical Results," IZA Discussion Papers 4860, Institute for the Study of Labor (IZA).
  4. Friedrich Schneider & Raul Caruso, 2011. "The (Hidden) Financial Flows of Terrorist and Transnational Crime Organizations: A Literature Review and Some Preliminary Empirical Results," Economics of Security Working Paper Series 52, DIW Berlin, German Institute for Economic Research.

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