The determinants of terrorist shocks' cross-market transmission
AbstractPurpose – 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 InfoArticle provided by Emerald Group Publishing in its journal Journal of Risk Finance.
Volume (Year): 11 (2010)
Issue (Month): 2 (February)
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Other versions of this item:
- Konstantinos Drakos, 2009. "The Determinants of Terrorist Shocks’ Cross-Market Transmission," Economics of Security Working Paper Series 17, DIW Berlin, German Institute for Economic Research.
- F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
- F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
- C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
- C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Longitudinal Data; Spatial Time Series
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