The Impact of Major Terrorist Attacks on Stock Prices: The Case of Karachi Stock Exchange

Abstract

Article HistoryReceived: 8 January JEL Classification:C22, K42, O16, G12, G15.Terrorist attacks tend to happen concomitantly, begetting widespread violence, perturb individual routine life, bring dire effect on the economy and ultimately cause volatility in stock prices. This research tries to assess the impact of substantial terrorist incidents that took place in the last five years in Pakistan on returns of major stock indices. We divide the methodology section into two segments: Event study is used in the first part to analyze the effect of three baleful terrorist attacks by employing secondary data of stock prices of KSE 100-index and ten major sectors of Karachi Stock Exchange. EGARCH model is employed to model volatility in the second segment of this paper for estimating the impact of eleven major terrorist incidents. With regards to the result obtained, it is concluded that out of eleven terrorist attacks, three prominent terrorist incidents that claimed more than a hundred deaths have significant negative impact on stock returns, however, the eight-minor type of terrorist activities don't impact stock returns of KSE 100-index in a significant way. Contribution/ Originality:This study contributes in the existing literature in a way that very few researches have been conducted to analysis the impact of terrorism on financial market in Pakistan. Moreover, this study uses new estimation methodology i.e. event study which has not been applied by any researcher previously in similar kind of study and then EGARCH model is employed to model the return volatility based on eleven major terrorists attacks in Pakistan.