The Effects of Rising Terrorism on a Small Capital Market: Evidence from Tunisia

ABSTRACT

The purpose of this paper is to shed light on the impact of the rising terrorist threat on the performance of a small capitalization market – the Tunisian stock market-. Using an event study methodology as well as conditional volatility, we investigate the impact of recent terrorist attacks in Tunisia on the general index TUNINDEX and sector indices. Our main findings are as follows. First, we find that terrorist attacks negatively affect the Tunisian stock market. However, the decline – considerable in certain cases- is short-lived: the market recovers from terrorist shocks in one day. Second, Oil and Gas, Insurance and Telecommunications, are the most affected sectors. Third, different terrorist tactics have varied effects on the stock market that leads us to conclude that attack type, weapon type, target type, and severity of the attack may determine the market’s reactions.

KEYWORDS:

• Terrorism
• financial market
• event study
• non-parametric test
• parametric test
• terrorist tactics
• Tunisia

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. On the economic level: lack of competitiveness, an unmanageable increase in inflation, unsustainable depreciation of the dinar, a flagrant deficit in the state budget and trade balance, and the country’s dangerous bogging down in foreign debt. On the social level, wage demands, and strikes. On the political level: terrorist attacks, political instability, tensions between political parties. The post-revolution five years are far from being a stable and ‘normal’ period. All these factors have pushed us to bring the norm of the calculations of expected returns back to the pre-revolutionary years.

2. Abnormal returns and CAR(0,5) for each terrorist attack are available upon request.

3. The results of all parametric and non-parametric tests used in the study are available upon request.

4. The absence of a sectorial diversity also affects the farming and transportation sectors.