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The Effects of Terrorism and War on the Oil and Prices Stock Indices Relationship

  • Christos Kollias
  • Catherine Kyrtsou
  • Stephanos Papadamou

This paper, investigates the effect war and terrorism, have on the covariance between oil prices and the indices of four major stock markets - the American S&P500 and the European DAX, CAC40 and FTSE100 - using nonlinear BEKK-GARCH type models. Findings reported herein indicate that the covariance between stock and oil returns is affected by war. A tentative explanation is that the two wars examined here, predispose investors and market agents for more profound and longer lasting effects. On the other hand, in the case of terrorist incidents that, vis-à-vis war, are of a more transitory nature and one-off security shocks, only the co-movement between CAC40, DAX and oil returns is affected. No significant impact for the same terrorist events is observed in the relationship between the S&P500, FTSE100 and oil returns. This difference in the reaction may tentatively be interpreted as indicating that the latter markets are more efficient in absorbing the impact of terrorist attacks.

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File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.391361.de/diw_econsec0057.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 57.

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Length: 30 p.
Date of creation: 2011
Date of revision:
Handle: RePEc:diw:diweos:diweos57
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  1. Park, Jungwook & Ratti, Ronald A., 2008. "Oil price shocks and stock markets in the U.S. and 13 European countries," Energy Economics, Elsevier, vol. 30(5), pages 2587-2608, September.
  2. Miller, J. Isaac & Ratti, Ronald A., 2009. "Crude oil and stock markets: Stability, instability, and bubbles," Energy Economics, Elsevier, vol. 31(4), pages 559-568, July.
  3. Eldor, Rafi & Melnick, Rafi, 2004. "Financial markets and terrorism," European Journal of Political Economy, Elsevier, vol. 20(2), pages 367-386, June.
  4. Jussi Nikkinen & Sami Vähämaa, 2010. "Terrorism and Stock Market Sentiment," The Financial Review, Eastern Finance Association, vol. 45(2), pages 263-275, 05.
  5. Papapetrou, Evangelia, 2001. "Oil price shocks, stock market, economic activity and employment in Greece," Energy Economics, Elsevier, vol. 23(5), pages 511-532, September.
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