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Cross-Country Stock Market Reactions to Major Terror Events: The Role of Risk Perception

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  • Konstantinos Drakos

Abstract

The 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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File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.354146.de/diw_econsec0016.pdf
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Bibliographic Info

Paper provided by DIW Berlin, German Institute for Economic Research in its series Economics of Security Working Paper Series with number 16.

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Length: 42 p.
Date of creation: 2009
Date of revision:
Handle: RePEc:diw:diweos:diweos16

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Related research

Keywords: Behavioral Economics; Risk Perception; Stock Market Return; Terrorism;

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References

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Cited by:
  1. 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).
  2. 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.
  3. 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.

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