Cross-Country Stock Market Reactions to Major Terror Events: The Role of Risk Perception
AbstractThe extant literature has established that the occurrence of major terrorist events leads to negative abnormal returns not only to the location of the event, but also to third countries. However, the literature has neither investigated which are the diffusion mechanisms of terrorist shocks, nor whether the diffusion pattern is uniform. Given terrorism's idiosyncrasies and motivated by memory-based utility and the Availability heuristic, we conjecture that the stock market reaction depends on the country's perceived terrorism risk. We document that terrorism risk perception is able to explain a statistically significant portion of cross-country abnormal returns' variation. Moreover, risk perception's predictive power over abnormal returns is robust, even when we take into account countries' terrorism record or when we control for economic linkages.
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Bibliographic InfoPaper provided by DIW Berlin, German Institute for Economic Research in its series Economics of Security Working Paper Series with number 16.
Length: 42 p.
Date of creation: 2009
Date of revision:
Behavioral Economics; Risk Perception; Stock Market Return; Terrorism;
Find related papers by JEL classification:
- C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
- D03 - Microeconomics - - General - - - Behavioral Microeconomics; Underlying Principles
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
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