How Different Terrorist Attacks Affect Stock Markets

Abstract

Terrorist attacks adversely affect the Pakistani stock market. However, such effect is short-lived: the market recovers from terrorist shocks in one day. The impact of attack depends on the locations and types of attack. The more severe the attack (i.e. more people killed), the more negative is the KSE-100 index return. Most interestingly, stock market contains information about future attacks. In sum, different tactics of terrorists have varied effects on financial markets, which in turn can predict terrorist attacks.

Keywords:

• Terrorist’s attack
• Event study
• Stock returns
• Karachi stock exchange (KSE)
• Drone attacks
• Geopolitical risk

JEL Codes:

• G10
• G14

Acknowledgments

The authors gratefully acknowledge the comments and suggestions of two anonymous referees that helped improved the paper. The usual disclaimer applies. This work was supported by the research fund of Hanyang University (HY-2012-N).

Notes

1 Bennett, Coleman and Co. Ltd., ‘Pakistan anti-terror campaign cost $68 bn in 10 years: Survey,’ economictimes. Indiatimes, http://articles.economictimes.indiatimes.com/2011-06-03/news/29617237_1_anti-terror-campaign-frontline-state-economic-survey (accessed Dec 3, 2011).

²The author talks about the consequences of poor corporate governance, political instability and terrorism on the economy of Pakistan. See Hashim Abro, ‘Corruption, terrorism & investment,’ pakobserver, http://pakobserver.net/detailnews.asp?id=108075 (accessed May 08, 2012).

³The madaris in Pakistan have played a key role in spreading militant jihadist ideologies and author use the term ‘terrorist factories’ for these madaris. The first madrassa was established in 1005 A.D. in Egypt. A militarized madrassa is one that apparently preaches Islam, but also includes a political agenda with the religious teachings.

⁴National Public Safety Commission. Anti-Terrorism Manual (Islamabad, National Police Bureau, 2008), 8. Available at: http://www.satp.org/satporgtp/countries/Pakistan/document/papers/images/Pakistan%20Doc.pdf.