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The Effects of Terrorism and War on the Oil and Prices Stock Indices Relationship

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Author Info

  • Christos Kollias
  • Catherine Kyrtsou
  • Stephanos Papadamou

Abstract

This paper, investigates the effect war and terrorism, have on the covariance between oil prices and the indices of four major stock markets - the American S&P500 and the European DAX, CAC40 and FTSE100 - using nonlinear BEKK-GARCH type models. Findings reported herein indicate that the covariance between stock and oil returns is affected by war. A tentative explanation is that the two wars examined here, predispose investors and market agents for more profound and longer lasting effects. On the other hand, in the case of terrorist incidents that, vis-à-vis war, are of a more transitory nature and one-off security shocks, only the co-movement between CAC40, DAX and oil returns is affected. No significant impact for the same terrorist events is observed in the relationship between the S&P500, FTSE100 and oil returns. This difference in the reaction may tentatively be interpreted as indicating that the latter markets are more efficient in absorbing the impact of terrorist attacks.

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File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.391361.de/diw_econsec0057.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 57.

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Length: 30 p.
Date of creation: 2011
Date of revision:
Handle: RePEc:diw:diweos:diweos57

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Keywords: war; terrorism; crude oil; stock market returns; co-movement;

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References

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  1. Jussi Nikkinen & Sami Vähämaa, 2010. "Terrorism and Stock Market Sentiment," The Financial Review, Eastern Finance Association, vol. 45(2), pages 263-275, 05.
  2. Park, Jungwook & Ratti, Ronald A., 2008. "Oil price shocks and stock markets in the U.S. and 13 European countries," Energy Economics, Elsevier, vol. 30(5), pages 2587-2608, September.
  3. J. Isaac Miller & Ronald Ratti, 2008. "Crude Oil and Stock Markets: Stability, Instability, and Bubbles," Working Papers 0810, Department of Economics, University of Missouri, revised 20 Jan 2009.
  4. Eldor, Rafi & Melnick, Rafi, 2004. "Financial markets and terrorism," European Journal of Political Economy, Elsevier, vol. 20(2), pages 367-386, June.
  5. Papapetrou, Evangelia, 2001. "Oil price shocks, stock market, economic activity and employment in Greece," Energy Economics, Elsevier, vol. 23(5), pages 511-532, September.
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Cited by:
  1. Christos Kollias & Stephanos Papadamou & Costas Siriopoulos, 2012. "Terrorism Induced Cross-Market Transmission of Shocks: A Case Study Using Intraday Data," Economics of Security Working Paper Series 66, DIW Berlin, German Institute for Economic Research.
  2. Moez Khalfallah & Bruno-Laurent Moschetto & Frédéric Teulon, 2014. "Evaluation of the profitability of companies financed by venture capital (CVC) listed on the French market," Working Papers 2014-085, Department of Research, Ipag Business School.
  3. Rania Jammazi & Duc Khuong Nguyen, 2014. "Responses of international stock markets to oil price surges: a regimeswitching perspective," Working Papers 2014-080, Department of Research, Ipag Business School.

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