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Big Questions, Little Answers: Terrorism Activity, Investor Sentiment and Stock Returns

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Author Info
Konstantinos Drakos

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Abstract

Motivated by the investor sentiment literature and assuming that terrorist activity influences investor mood the paper explores whether terrorism exerts a significant negative impact on daily stock market returns for a sample of 22 countries. The employed empirical specifications are based on flexible versions of the World CAPM allowing for autoregressive conditional heteroscedasticity. The results suggest that terrorist activity leads to significantly lower returns on the day of terrorist attack occurrence. In addition, the negative effect of terrorist activity is substantially amplified as the level of psychosocial effects increases. On the one hand this evidence sheds light to the underlying mechanism via which terrorism affects stock markets while on the other hand provides further empirical support for the sentiment effect.

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File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.95740.de/diw_econsec0008.pdf
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Paper provided by DIW Berlin, German Institute for Economic Research in its series Economics of Security Working Paper Series with number 8.

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Length: 30 p.
Date of creation: 2009
Date of revision:
Handle: RePEc:diw:diweos:diweos8

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Related research
Keywords: Sentiment; Terrorism; Stock Market; Panel; Pooled Panel ARCH;

Find related papers by JEL classification:
C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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    Other versions:
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    Other versions:
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