Terrorism, investor sentiment, and stock market reaction: Evidence from the British and the French markets

We examine whether and how terrorist attacks influence the British and the French stock markets through investor sentiment. Using a quantile regression approach, our results indicate that terrorist attacks have adverse effects on the British and the French stock market returns under extreme market conditions. In terms of volatility, surprisingly, we find that these exogenous events decrease the volatility of the British (French) stock market under different market conditions (around the median and at the extreme top quantile). We also document a sizeable contribution of investor sentiment in explaining the effects of major terrorist attacks on the two European stock markets.