Impact of terrorism on stock market: Evidence from developed and developing markets

This study examines the impact of terrorism on stock market returns through an extensive dataset of 23 countries over the period of 2001-2017. Stock market returns are examined in the context of different aspects of terrorist attacks such as number of suicide attack, number of people killed in terrorist attacks, attacks in major and capital city, the distance of terrorist attack from capital city, property damaged due to terrorist attack and nationality of the victims being killed in a terrorist attack. Consistent with previous studies, our regression analysis reveals that assaults in capital city and severity of attacks negatively influence the index returns. Particularly, the results provide some new insights, with respect to terrorist attacks intended for targeting specific locations with strategic advantages, and assaults in close proximity of capital are found to have more pronounced and devastating effect on the stock market returns. Moreover, foreigners are strategically more valuable targets for terrorists in order to disrupt the smooth functioning of capital markets. The analyses of sub samples, reveal that developing economies are more fragile and developed markets are more resilient to terrorism. Our robust analysis through event methodology confirms our main findings and reveal that negative response of stock market to terrorist attacks is more prominent in developing countries and developed capital markets are more resilient to the negative shocks of terrorist attacks.