Terrorism activity, investor sentiment, and stock returns
Motivated by the literature on investor sentiment and assuming that terrorist activity influences investor mood, in this paper we explore whether terrorism exerts a significant negative impact on daily stock market returns in 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 a terrorist attack occurs. 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 on the underlying mechanism via which terrorism affects stock markets while on the other hand, it provides further empirical support for the sentiment effect.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Abadie, Alberto & Gardeazabal, Javier, 2008.
"Terrorism and the world economy,"
European Economic Review,
Elsevier, vol. 52(1), pages 1-27, January.
- Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
- Chen, Andrew H. & Siems, Thomas F., 2004. "The effects of terrorism on global capital markets," European Journal of Political Economy, Elsevier, vol. 20(2), pages 349-366, June.
- Cao, Melanie & Wei, Jason, 2005. "Stock market returns: A note on temperature anomaly," Journal of Banking & Finance, Elsevier, vol. 29(6), pages 1559-1573, June.
- Nikkinen, Jussi & Omran, Mohammad M. & Sahlstrom, Petri & Aijo, Janne, 2008. "Stock returns and volatility following the September 11 attacks: Evidence from 53 equity markets," International Review of Financial Analysis, Elsevier, vol. 17(1), pages 27-46.
- Kato, Kiyoshi & Schallheim, James S., 1985. "Seasonal and Size Anomalies in the Japanese Stock Market," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 20(02), pages 243-260, June.
- Drakos, Konstantinos, 2004. "Terrorism-induced structural shifts in financial risk: airline stocks in the aftermath of the September 11th terror attacks," European Journal of Political Economy, Elsevier, vol. 20(2), pages 435-446, June.
- Gibbons, Michael R & Hess, Patrick, 1981. "Day of the Week Effects and Asset Returns," The Journal of Business, University of Chicago Press, vol. 54(4), pages 579-96, October.
- Charles, Amelie & Darne, Olivier, 2006. "Large shocks and the September 11th terrorist attacks on international stock markets," Economic Modelling, Elsevier, vol. 23(4), pages 683-698, July.
- Alex Edmans & Diego García & Øyvind Norli, 2007. "Sports Sentiment and Stock Returns," Journal of Finance, American Finance Association, vol. 62(4), pages 1967-1998, 08.
- Stracca, Livio, 2004. "Behavioral finance and asset prices: Where do we stand?," Journal of Economic Psychology, Elsevier, vol. 25(3), pages 373-405, June.
- David Hirshleifer & TYLER G. SHUMWAY, 2004.
"Good Day Sunshine: Stock Returns and the Weather,"
- Tim Bollerslev, 1986.
"Generalized autoregressive conditional heteroskedasticity,"
EERI Research Paper Series
EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
- Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
- Fama, Eugene F & French, Kenneth R, 1996. " Multifactor Explanations of Asset Pricing Anomalies," Journal of Finance, American Finance Association, vol. 51(1), pages 55-84, March.
- Robert J. Shiller, 2002.
"From Efficient Market Theory to Behavioral Finance,"
Cowles Foundation Discussion Papers
1385, Cowles Foundation for Research in Economics, Yale University.
- Robert J. Shiller, 2003. "From Efficient Markets Theory to Behavioral Finance," Journal of Economic Perspectives, American Economic Association, vol. 17(1), pages 83-104, Winter.
- Eldor, Rafi & Melnick, Rafi, 2004. "Financial markets and terrorism," European Journal of Political Economy, Elsevier, vol. 20(2), pages 367-386, June.
- Yuan, Kathy & Zheng, Lu & Zhu, Qiaoqiao, 2006. "Are investors moonstruck? Lunar phases and stock returns," Journal of Empirical Finance, Elsevier, vol. 13(1), pages 1-23, January.
- Hirshleifer, David, 2001.
"Investor Psychology and Asset Pricing,"
5300, University Library of Munich, Germany.
- Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
- Carter, David A. & Simkins, Betty J., 2004. "The market's reaction to unexpected, catastrophic events: the case of airline stock returns and the September 11th attacks," The Quarterly Review of Economics and Finance, Elsevier, vol. 44(4), pages 539-558, September.
- Jeffrey Jaffe & R. Westerfield, . "The Week-End Effect in Common Stock Returns: The International Evidence," Rodney L. White Center for Financial Research Working Papers 3-85, Wharton School Rodney L. White Center for Financial Research.
- Jeffrey Jaffe & R. Westerfield, . "The Week-End Effect in Common Stock Returns: The International Evidence," Rodney L. White Center for Financial Research Working Papers 03-85, Wharton School Rodney L. White Center for Financial Research.
- Saunders, Edward M, Jr, 1993. "Stock Prices and Wall Street Weather," American Economic Review, American Economic Association, vol. 83(5), pages 1337-45, December.
- Jaffe, Jeffrey F & Westerfield, Randolph, 1985. " The Week-End Effect in Common Stock Returns: The International Evidence," Journal of Finance, American Finance Association, vol. 40(2), pages 433-54, June.
When requesting a correction, please mention this item's handle: RePEc:eee:revfin:v:19:y:2010:i:3:p:128-135. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.