The Impact of Terrorism on Liquidity and Information Asymmetry: Evidence from Non-U.S. Stocks Listed on the NYSE

ABSTRACT

In this paper, we examine the impact of a country’s terrorism activity on the liquidity and information asymmetry of non-U.S. stocks listed on the New York Stock Exchange (NYSE) between 2011 and 2019. Our study shows that non-U.S. stocks from countries with higher terrorism index scores demonstrate wider spreads and lower market quality. Furthermore, these stocks display more pronounced price impacts resulting from trades and a higher probability of information-based trading. Additionally, we investigate the impact of major terrorism incidents in Europe on non-U.S. stocks and find that liquidity deteriorates for stocks from countries in the aftermath of terrorist activity, and that the effect from these individual incidents are contained to the first day. These findings imply that a country’s level of terrorism activity significantly influences the market quality of non-U.S. stocks.

KEYWORDS:

• Terrorism index
• bid-ask spreads
• information-based trading
• safety and security index
• market liquidity

JEL CLASSIFICATION:

• F52
• G10

Disclosure statement

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

Notes

1. Source: Global Terrorism Database (2022), https://www.start.umd.edu/research-projects/global-terrorism-database-gtd.

2. This measure assumes a linear liquidity supply schedule (i.e. a linear tradeoff between the spread and depth), which may not accurately capture actual preferences of liquidity providers.

3. Note that the realized spread is equal to the difference between the effective spread and the price impact of trades, all expressed in dollars: 2D_i,t (P_i,t – M_i,t + 5) = 2D_i,t (P_i,t – M_i,t) – 2D_i,t(M_i,t + 5 – M_i,t).

4. The EKOP model assumes that buy and sell orders from uninformed traders are equally likely.