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Terrorism Shocks and Stock Market Reaction Patterns

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  • Christos Kallandranis
  • Konstantinos Drakos

Abstract

In this Policy Briefing, we discuss two important questions: (i) whether and how terrorism shocks are transmitted across international stock markets, (ii) what is the role of behavioral factors in explaining these stock market reactions. According to our findings terrorism shocks are indeed diffused cross-nationally in a non-uniform manner. Economic channels such as the degree of a country's integration with the world market, its liquidity and its ties to the zeroground country are found to play an important role. Additionally, we document that the likelihood and the size of a negative stock market reaction increase with a country's terrorism record and terrorism risk concern, as well as the psychosocial impact caused by the terrorism incident.

Suggested Citation

  • Christos Kallandranis & Konstantinos Drakos, 2011. "Terrorism Shocks and Stock Market Reaction Patterns," EUSECON Policy Briefing 14, DIW Berlin, German Institute for Economic Research.
  • Handle: RePEc:diw:diwepb:diwepb14
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    File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.391400.de/diw_eusecon_pb0014.pdf
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    References listed on IDEAS

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    1. 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.
    2. Alberto Abadie & Javier Gardeazabal, 2003. "The Economic Costs of Conflict: A Case Study of the Basque Country," American Economic Review, American Economic Association, vol. 93(1), pages 113-132, March.
    3. 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.
    4. Drakos, Konstantinos, 2010. "Terrorism activity, investor sentiment, and stock returns," Review of Financial Economics, Elsevier, vol. 19(3), pages 128-135, August.
    5. Mahfuzul Haque & Imen Kouki, 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.
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