The Determinants of Terrorist Shocks¿ Cross-Market Transmission
AbstractThe determinants of the cross-market transmission mechanism for terrorist shocks are explored, focusing on two major terrorist events and 68 national stock markets. We generate 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. Our findings indicate that terrorism shocks are diffused cross-nationally, and moreover this diffusion is non-uniform. We find empirical support for all three channels when considered separately. The bilateral integration channel contains the highest explanatory power since we find that a third country's trade linkages with the "ground-zero" country explain about 24 % 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 % of abnormal return variation, while the liquidity channel exhibits the lowest predictive power, with the value of stock trading explaining about 6 %. A hybrid model, were 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.
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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 17.
Length: 37 p.
Date of creation: 2009
Date of revision:
Linkages; Stock Market Return; Terrorism;
Other versions of this item:
- Konstantinos Drakos, 2010. "The determinants of terrorist shocks' cross-market transmission," Journal of Risk Finance, Emerald Group Publishing, vol. 11(2), pages 147-163, February.
- 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; Spatio-temporal Models
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