Measuring and testing the long-term impact of terrorist attacks on the US futures market

Abstract

This article investigates the long-term impact of the 11 September 2001 terrorist attacks on the maturity, volume and open interest effects for the S&P 500 index futures contracts. Adopting Chou (2005a, b)'s range-based volatility models, this article provides a number of interesting results. For the maturity effect, we find evidence for a very weak presence in the pre 9/11 period and no presence in the post 9/11 period, indicating that the maturity effect vanishes completely following the event of 9/11. Despite a strong presence of the volume effect in both periods, we detect a relative decrease in the presence during the post 9/11 period. The open interest effect shows a very weak presence during the pre 9/11 period and a strong presence during the post 9/11 period, indicating a stronger open interest effect following the event of 9/11. Furthermore, we show that there is a bi-directional causality relationship between futures volatility and trading volume during the pre 9/11 period, and that the causality relationship between the two variables becomes unidirectional during the post 9/11 period.

Keywords:

• terrorist attack
• maturity effect
• volume effect
• open interest effect
• range-based volatility model

JEL Classification:

• C10
• C50

Acknowledgements

We are grateful to the Editor, Mark Taylor, and the anonymous referees for their helpful comments and suggestions on earlier versions of this article. All remaining errors are ours. Financial support from the National Science Council of Taiwan is also gratefully acknowledged.

Notes

¹ Note that the authors have conducted several short-term analyses and have found no significant evidence of any short-term impact of 9/11 event on the US futures market. Therefore, in this study, the authors carry out a much longer-term analysis to investigate the long-term impact of the 9/11 event. The authors thank one anonymous reviewer for pointing out this important aspect of the analysis in this study.

² As one anonymous reviewer points out, other major events could also have long-term impact on the financial markets. For example, the 1997 Asian financial crisis, the 2000 US dot-com bubble, the 2007 US sub-prime mortgage crisis, and the 2010 European sovereign debt crisis. We believe that the methodology used in this article can also be applied to study the financial impact of those major events as well. We thank the anonymous reviewer for bringing this point to our attention.

³ Note that, to save space, the estimation results for the CARR (2, 1) model are omitted here.

⁴ Note that, to save space, the estimation results for the ACARR (2, 1) model w/upward ranges are omitted here.

⁵ Note that, to save space, the estimation results for the ACARR (1, 1) and ACARR (2, 1) models w/downward ranges are omitted here.

⁶ Again, to save space, we omit the estimation results for the ACARR (2, 1) model (w/upward ranges), and the ACARR (1, 1) and ACARR (2, 1) models (w/downward ranges).