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An Examination of "New" and "Old" Terrorism Using High-Frequency Data

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  • John Garvey
  • Martin Mullins
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    Abstract

    The impact of large-scale terrorist attacks has clear implications for financial market participants and corporate risk management. In this paper, that impact is measured in the intraday trading patterns of participants in the London stock market. A two-scale realized volatility (TSRV) estimator is used to provide an insight into market activity in a number of FTSE-100 companies in the days around the Madrid (11M) bombing. Furthermore, empirical trading patterns, reflected in trade volumes and five-minute realized volatility, are used to identify changes in risk perceptions in the immediate aftermath of the 11M attack. Intraday tick data illustrates the distinct perceptions of risk associated with "old" terrorism and "new" terrorism as represented by Al-Qaeda.

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    File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.354150.de/diw_econsec0018.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 18.

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    Length: 22 p.
    Date of creation: 2009
    Date of revision:
    Handle: RePEc:diw:diweos:diweos18

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    Keywords: Political risk; terrorist risk; financial markets; realized volatility;

    References

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    1. Robin Hogarth, 2005. "The challenge of representative design in psychology and economics," Journal of Economic Methodology, Taylor & Francis Journals, Taylor & Francis Journals, vol. 12(2), pages 253-263.
    2. Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Paul Labys, 2001. "Modeling and Forecasting Realized Volatility," Center for Financial Institutions Working Papers, Wharton School Center for Financial Institutions, University of Pennsylvania 01-01, Wharton School Center for Financial Institutions, University of Pennsylvania.
    3. Zhang, Lan & Mykland, Per A. & Ait-Sahalia, Yacine, 2005. "A Tale of Two Time Scales: Determining Integrated Volatility With Noisy High-Frequency Data," Journal of the American Statistical Association, American Statistical Association, American Statistical Association, vol. 100, pages 1394-1411, December.
    4. Drakos, Konstantinos & Kutan, Ali M., 2001. "Regional effects of terrorism on tourism: Evidence from three Mediterranean countries," ZEI Working Papers, ZEI - Center for European Integration Studies, University of Bonn B 26-2001, ZEI - Center for European Integration Studies, University of Bonn.
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    6. Patrick Lenain & Marcos Bonturi & Vincent Koen, 2002. "The Economic Consequences of Terrorism," OECD Economics Department Working Papers, OECD Publishing 334, OECD Publishing.
    7. Zhou, Bin, 1996. "High-Frequency Data and Volatility in Foreign-Exchange Rates," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 14(1), pages 45-52, January.
    8. Bertrand B. Maillet & Thierry L. Michel, 2005. "The Impact of the 9/11 Events on the American and French Stock Markets," Review of International Economics, Wiley Blackwell, Wiley Blackwell, vol. 13(3), pages 597-611, 08.
    9. Ser-Huang Poon & Clive W.J. Granger, 2003. "Forecasting Volatility in Financial Markets: A Review," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 41(2), pages 478-539, June.
    10. Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
    11. Shleifer, Andrei, 2000. "Inefficient Markets: An Introduction to Behavioral Finance," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780198292272, October.
    12. Torben G. Andersen & Tim Bollerslev & Nour Meddahi, 2005. "Correcting the Errors: Volatility Forecast Evaluation Using High-Frequency Data and Realized Volatilities," Econometrica, Econometric Society, Econometric Society, vol. 73(1), pages 279-296, 01.
    13. Fox, Craig R & Tversky, Amos, 1995. "Ambiguity Aversion and Comparative Ignorance," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 110(3), pages 585-603, August.
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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, DIW Berlin, German Institute for Economic Research 58, DIW Berlin, German Institute for Economic Research.

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