How vulnerable are international financial markets to terrorism? An empirical study based on terrorist incidents worldwide

Each year, millions of dollars are reported lost due to terrorist attacks around the world. In this paper, we conduct a systematic examination of the impact of terrorist attacks on financial markets. We specifically explore the relationship between world stock market indices and large-scale terrorist incidents. We consider sixteen incidents outside the U.S. and thirty-three incidents in the U.S. We use several indices in our analysis, including the S&P 500, the 10-year US Treasury bond yield, gold prices, and several other domestic and international stock market indices. Given the physical asset losses and the psychological impact on citizens, our expectation was to see a strong correlation between terrorist incidents and financial market valuations. However, to our surprise, with the exception of the September 11, 2001 terrorist attacks, our results show that acts of terrorism do not have a significant or lasting economic effect on stock and bond market returns. Contrary to our starting hypothesis, we find no evidence of ‘flight to safety’ behavior in any of the markets.