The Effects of Terrorism on Turkish Financial Markets

Abstract

In this research, we analyzed how Turkish financial markets and foreign investors in the stock market reacted to the terror attacks in Turkey. Our analysis, which was performed using the terror index for the stock market and the foreign exchange market, revealed that returns, abnormal returns, and cumulative abnormal returns were not affected by the terror attacks; however, foreign investors in the stock market were affected. When the geographic regions of the terror attacks were analyzed, the findings showed that foreign investors were negatively affected mainly by the terror attacks that occurred in southeast Anatolia. Attack type and target type were important only for foreign investors. An evaluation of the interaction between the terror attacks and the markets with the involvement of the terrorist organizations indicated that only the foreign investors in the stock market were affected by Al-Qaeda and PKK-linked terror attacks. An evaluation of the effect of terror attacks in foreign countries on Turkish financial markets revealed no effect on the domestic stock market and foreign exchange markets. We also examined the volatility spillovers from the terror index to the stock market and found that terrorist attacks increased the volatility of the stock market.

Keywords:

• Stock market
• foreign exchange market
• foreign investors
• volatility
• terrorism

Notes

1. “Established in 1978, the PKK (Kurdistan Workers Party) started its armed struggle in 1984 after a preparatory period of numerous murders and attacks, with the objective of establishing, through armed struggle, an independent Kurdistan within Turkey’s borders.” http://www.mfa.gov.tr/pkk_kongra-gel.en.mfa, 2013 (Accessed April 24).

2. National Consortium for the Study of Terrorism and Responses to Terrorism (START), Global Terrorism Database (http://www.start.umd.edu/gtd).

3. The Central Registry Agency Inc. is the central depository for all dematerialized capital market instruments in Turkey, which was established in 2001 as a private company, and the dematerialization process was completed in 2006, but for equities, it was completed in 2007. The handbook of the Turkish Capital Markets, https://www.tspb.org.tr/wp-content/uploads/2015/06/Handbook_2015_web.pdf, 2016, 55–56. (Accessed August 30).

4. Terror index calculation logic has been changed as natural logarithm of (e + 3*number of people killed + 2*number of people wounded + number of people taken as hostages + number of attacks) and calculations are done again with this new index. The index calculation logic does not change the results. The results are not reported in the Tables but will be given upon request.