The Impact of Terrorist Attacks on International Stock Markets

Abstract

We examine the effects of terrorist attacks on stock markets, using a dataset that covers all significant events and that directly relate to the major economies of the world. Our event study suggests that terrorist attacks produce mildly negative price effects. We compare these price reactions to those from an alternative type of unanticipated disaster, earthquakes, and find that price declines following terror attacks are more pronounced. However, in both cases prices rebound within the first week of the aftermath. We also compare price responses internationally and for separate industries, and find that reactions are strongest for local markets and for industries that are directly affected by the attack. Our results suggest that financial markets react strongly to terror events but then recover swiftly and soon return to business as usual. The September 11th attacks turn out to be the only event that caused long-term effects on financial markets, especially in terms of industries' systematic risk.

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“…Furthermore, incidents that occurred in richer and more democratic countries and those in which human capital was destroyed induced a stronger negative market reaction. Instead of focusing on individual companies, Brounrn and Derwall (2010) examined the behavior of stock market indices in countries where terrorist attacks have taken place. They found that the abnormal return amounted to -0.92% on the event day -a more powerful response compared to that caused by earthquakes.…”

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“…The event's specific characteristics have surfaced as a vital element of stock market reaction. Indicatively, Brounrn and Derwall (2010) suggested that terrorism incidents have a greater economic impact, especially on the day of the event, compared with unanticipated natural catastrophes, whereas Chesney et al (2011) argued that the latter exhibit longer post-event impact due to the delay in measuring their actual catastrophic effects. Moreover, Aslam and Kang (2015) posited that the location, type, intensity (measured by the number of fatalities), and tactics of the attack affect stock market behavior, whereas Essaddam and Karagianis (2014) argued that the geographic location in which the attack occurred influenced its overall impact.…”

“…Overall, research suggests that such incidents cause drastic, but short-term transitory effects on stock markets, especially on the first day, with recovery in most cases occurring within one to two days (Brounrn & Derwall, 2010;Chesney et al, 2011;Drakos, 2010). Kollias, Papadaumou and Stagiannis (2011), by contrasting the stock behavior following the attacks in Madrid (2004) and London (2005), suggested that recovery may be affected by both the type of the attack, and the promptness and adequacy of the country's institutional responses, an argument that is supported by Essaddam and Karagianis (2014), and Aslam and Kang (2015).…”

“…Indicatively, Chesney et al (2011) suggested that two-thirds of the terrorists' attacks investigated in their study caused a significant negative effect on stock markets. Charles and Darne (2006) argued that the shock, both permanent and temporary, is extensive, whereas Brounrn and Derwall (2010) posited that terrorist attacks produce mildly negative price effects on stock market prices. It is, therefore, prudent to conclude that methodological heterogeneities, the specificities of the actual event, and the target-destination idiosyncrasies, influence the overall impact; a notion that is also supported by Essaddam and Karagianis (2014).…”

“…Echoing similar reasoning, Brounrn and Derwall (2010) posited that industries directly affected by an incident (for example, the airline industry in the aftermath of the September 11th, 2001 attacks in the USA) exhibit stronger reactions that may not be adequately portrayed in generic market indices. Moreover, Essaddam and Karagianis (2014) introduce a regional aspect to the 'equation' by suggesting that the attributes, and perceived national risk (Chen, 2007), of the specific country suffering the attack may influence the overall impact.…”