Terrorism, country attributes, and the volatility of stock returns
This study investigates the interplay between terrorism and finance, focusing on the stock return volatility of American firms targeted by terrorist attacks. We find terrorism risk is an important factor in explaining the volatility of stock returns, which should be taken into account when modelling volatility. Using a volatility event-study approach and a new bootstrapping technique, we find volatility increases on the day of the attack and remain significant for at least fifteen days following the day of the attack. Cross-sectional analysis of the abnormal volatility indicates that the impact of terrorist attacks differs according to the country characteristics in which the incident occurred. We find that firms operating in wealthier, or more democratic countries, face greater volatility in stock returns relative to firms operating in developing countries. Firm exposure varies with the nature of country location, with country wealth and level of democracy playing an important role in explaining the likelihood of a terrorist attack. Our results show that despite significant terrorist events this past decade, stock markets in developed countries have not taken terrorist risk into sufficient consideration.
Volume (Year): 31 (2014)
Issue (Month): C ()
|Contact details of provider:|| Web page: http://www.elsevier.com/locate/ribaf|
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.:
- Brown, Stephen J. & Warner, Jerold B., 1985. "Using daily stock returns : The case of event studies," Journal of Financial Economics, Elsevier, vol. 14(1), pages 3-31, March.
- Bruno S. Frey & Simon Luechinger & Alois Stutzer, 2007.
"Calculating Tragedy: Assessing The Costs Of Terrorism,"
Journal of Economic Surveys,
Wiley Blackwell, vol. 21(1), pages 1-24, 02.
- Bruno S. Frey & Simon Luechinger & Alois Stutzer, "undated". "Calculating Tragedy: Assessing the Costs of Terrorism," IEW - Working Papers 205, Institute for Empirical Research in Economics - University of Zurich.
- Bruno S. Frey & Simon Luechinger & Alois Stutzer, 2004. "Calculating Tragedy: Assessing the Costs of Terrorism," CREMA Working Paper Series 2004-23, Center for Research in Economics, Management and the Arts (CREMA).
- Bruno S. Frey & Simon Luechinger & Alois Stutzer, 2004. "Calculating Tragedy: Assessing the Costs of Terrorism," CESifo Working Paper Series 1341, CESifo Group Munich.
- Asger Lunde & Peter R. Hansen, 2005. "A forecast comparison of volatility models: does anything beat a GARCH(1,1)?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 20(7), pages 873-889.
- Asger Lunde & Peter Reinhard Hansen, 2001. "A Forecast Comparison of Volatility Models: Does Anything Beat a GARCH(1,1)?," Working Papers 2001-04, Brown University, Department of Economics.
- Dreher, Axel & Gassebner, Martin, 2008. "Does political proximity to the U.S. cause terror?," Economics Letters, Elsevier, vol. 99(1), pages 27-29, April.
- S. Brock Blomberg & Gregory D. Hess, 2006. "How Much Does Violence Tax Trade?," The Review of Economics and Statistics, MIT Press, vol. 88(4), pages 599-612, November.
- S. Brock Blomberg & Gregory D. Hess, 2004. "How Much Does Violence Tax Trade?," CESifo Working Paper Series 1222, CESifo Group Munich.
- White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-838, May.
- Dubofsky, David A, 1991. " Volatility Increases Subsequent to NYSE and AMEX Stock Splits," Journal of Finance, American Finance Association, vol. 46(1), pages 421-431, March.
- Pinar Derin-Güre, 2009. "Does Terrorism Have Economic Roots?," Boston University - Department of Economics - Working Papers Series wp2009-001, Boston University - Department of Economics.
- Soosung Hwang & Pedro L. Valls Pereira, 2006. "Small sample properties of GARCH estimates and persistence," The European Journal of Finance, Taylor & Francis Journals, vol. 12(6-7), pages 473-494.
- Hwang. S. & Pedro L. Valls Pereira, 2003. "Small Sample Properties of GARCH Estimates and Persistence," Finance Lab Working Papers flwp_48, Finance Lab, Insper Instituto de Ensino e Pesquisa.
- Chesney, Marc & Reshetar, Ganna & Karaman, Mustafa, 2011. "The impact of terrorism on financial markets: An empirical study," Journal of Banking & Finance, Elsevier, vol. 35(2), pages 253-267, February.
- Jimmy E. Hilliard & Robert Savickas, 2002. "On the Statistical Significance of Event Effects on Unsystematic Volatility," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 25(4), pages 447-462.
- Schwert, G William, 1989. " Why Does Stock Market Volatility Change over Time?," Journal of Finance, American Finance Association, vol. 44(5), pages 1115-1153, December.
- G. William Schwert, 1988. "Why Does Stock Market Volatility Change Over Time?," NBER Working Papers 2798, National Bureau of Economic Research, Inc.
- Bialkowski, Jedrzej & Gottschalk, Katrin & Wisniewski, Tomasz Piotr, 2008. "Stock market volatility around national elections," Journal of Banking & Finance, Elsevier, vol. 32(9), pages 1941-1953, September.
- Bialkowski, Jedrzej & Gottschalk, Katrin & Wisniewski, Tomasz, 2006. "Stock market volatiltity around national elections," MPRA Paper 302, University Library of Munich, Germany, revised Nov 2006.
- Bialkowski, Jedrzej & Gottschalk, Katrin & Wisniewski, Tomasz Piotr, 2006. "Stock Market Volatility around National Elections," Working Paper Series 2006,2, European University Viadrina Frankfurt (Oder), The Postgraduate Research Programme Capital Markets and Finance in the Enlarged Europe.
- Kollias, Christos & Papadamou, Stephanos & Stagiannis, Apostolos, 2011. "Terrorism and capital markets: The effects of the Madrid and London bomb attacks," International Review of Economics & Finance, Elsevier, vol. 20(4), pages 532-541, October.
- Axel Dreher & Justina A. V. Fischer, 2010. "Government Decentralization As A Disincentive For Transnational Terror? An Empirical Analysis," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 51(4), pages 981-1002, November.
- Axel Dreher & Justina A. V. Fischer, 2009. "Government decentralization as a disincentive for transnational terror? An empirical analysis," Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim 313/2009, Department of Economics, University of Hohenheim, Germany.
- Dreher, Axel & Fischer, Justina A.V., 2009. "Government Decentralization as a Disincentive for Transnational Terror? An Empirical Analysis," IZA Discussion Papers 4259, Institute for the Study of Labor (IZA).
- Axel Dreher & Justina A.V. Fischer, 2009. "Government Decentralization as a Disincentive for Transnational Terror? An Empirical Analysis," CESifo Working Paper Series 2699, CESifo Group Munich.
- Drakos, Konstantinos, 2010. "Terrorism activity, investor sentiment, and stock returns," Review of Financial Economics, Elsevier, vol. 19(3), pages 128-135, August.
- Shiller, Robert J, 1981. "Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?," American Economic Review, American Economic Association, vol. 71(3), pages 421-436, June.
- Robert J. Shiller, 1980. "Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?," NBER Working Papers 0456, National Bureau of Economic Research, Inc.
- Michael R Czinkota & Gary Knight & Peter W Liesch & John Steen, 2010. "Terrorism and international business: A research agenda," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 41(5), pages 826-843, June.
- Matthew C. Clayton & Jay C. Hartzell & Joshua Rosenberg, 2005. "The Impact of CEO Turnover on Equity Volatility," The Journal of Business, University of Chicago Press, vol. 78(5), pages 1779-1808, September.
- Matthew J. Clayton & Jay C. Hartzell & Joshua V. Rosenberg, 2003. "The impact of CEO turnover on equity volatility," Staff Reports 166, Federal Reserve Bank of New York.
- Shanks, Cheryl & Jacobson, Harold K. & Kaplan, Jeffrey H., 1996. "Inertia and change in the constellation of international governmental organizations, 1981–1992," International Organization, Cambridge University Press, vol. 50(04), pages 593-627, September.
- Boehmer, Ekkehart & Masumeci, Jim & Poulsen, Annette B., 1991. "Event-study methodology under conditions of event-induced variance," Journal of Financial Economics, Elsevier, vol. 30(2), pages 253-272, December.
- Mark T. Hon & Jack Strauss & Soo-Keong Yong, 2004. "Contagion in financial markets after September 11: myth or reality?," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 27(1), pages 95-114.
- Vincent Richman & Michael R. Santos & John T. Barkoulas, 2005. "Short- And Long-Term Effects Of The 9/11 Event: The International Evidence," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 8(07), pages 947-958.
- Mahfuzul Haque, 2009. "Effect of 9/11 on the conditional time-varying equity risk premium: evidence from developed markets," Journal of Risk Finance, Emerald Group Publishing, vol. 10(3), pages 261-276, May.
- 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. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:eee:riibaf:v:31:y:2014:i:c:p:87-100. 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: (Dana Niculescu)
If references are entirely missing, you can add them using this form.