A consumer-choice theoretical model is developed to test the regional effects of terrorism on competitors' market shares in the tourism sector where involved countries enjoy significant tourism activities but are subject to a high frequency of terrorist attacks. Using data for three Mediterranean countries—Greece, Israel, and Turkey—for the period from January 1991 to December 2000, results show significant own and spillover effects of terrorism on market shares. Terrorist incidents are decomposed to better identify the impacts of terrorism on tourism. Significant contagion effects of terrorism on market shares in the region are documented, as is evidence of the effect of terrorism on the substitutability between countries.

JEL classification: C33 E44 G15 Keywords: Sentiment Terrorism Stock market Panel Pooled panel ARCHMotivated 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.

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In this paper we develop an empirical model for transnational terrorist activity for a panel consisting of 139 countries over the period [1985][1986][1987][1988][1989][1990][1991][1992][1993][1994][1995][1996][1997][1998]. Essentially, we attempt to sketch the profile of the average terrorist attack venue. Our findings suggest that the terrorist attack venue is, on average, characterized by low economic openness, high demographic stress, and a high level of international disputes. Furthermore, we document a strong regional component suggesting the presence of infectious contagion on a spatial level. Our results also support the presence of addictive contagion captured by a strong autoregressive component in each country's terrorist activity. Finally, we find a weak statistical link between the level of democracy and terrorist activity, although the level of democracy is a significant determinant of the potential under-reporting bias of terrorist activity.