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Terrorism and Stock Market Sentiment

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  • Jussi Nikkinen
  • Sami Vähämaa

Abstract

This paper examines the effects of terrorism on stock market sentiment by focusing on the behavior of expected probability density functions of the FTSE 100 index around terrorist attacks. We find that terrorism has a strong adverse impact on stock market sentiment. In particular, terrorist attacks are found to cause a pronounced downward shift in the expected value of the FTSE 100 index and a significant increase in stock market uncertainty. Furthermore, our results show that the expected FTSE 100 probability densities became significantly more negatively skewed and fat‐tailed in the immediate aftermath of terrorist acts.

Suggested Citation

  • Jussi Nikkinen & Sami Vähämaa, 2010. "Terrorism and Stock Market Sentiment," The Financial Review, Eastern Finance Association, vol. 45(2), pages 263-275, May.
  • Handle: RePEc:bla:finrev:v:45:y:2010:i:2:p:263-275
    DOI: 10.1111/j.1540-6288.2010.00246.x
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