Do Investors React to Terrorism and Peace in Colombia?

ABSTRACT

This paper studies the impact of terrorist attacks on the returns and volatility of Colombian stock returns using an event study methodology in a GARCH model framework. It also investigates the impact of the 2016 peace accord between the Colombian government and the FARC, an army of leftist narco-guerrillas, on the same characteristics of the financial market. Results show that the COLCAP index, a market-capitalization weighted index that includes the 25 most liquid stocks listed in the Colombia’s stock exchange, has a significant negative abnormal return of 0.1% 1 day after a bombing attack occurs, that continues to accumulate down to −0.18% 3 days after. Furthermore, events associated with the peace accord, exhibit a significant positive abnormal return of 0.58% on the event date that continues to accumulate up to 1.02% the day after. In addition, cumulative abnormal volatility (CAV) is statistically insignificant both after terrorist attacks and peace-associated events.

KEYWORDS:

• Terrorism
• conflict
• Colombia
• event studies

JEL:

• G14
• C22
• F51

Notes

1. Either S&P 500 Index, MSCI World index, Ibovespa Brazil Sao Paulo Stock Exchange index when regressed with the COLCAP index as the dependent variable or the COLCAP index when regressed with any Colombian stock as the dependent variables.

2. In that line, there is a non-trivial number of events that are not considered in our sample, since most of the terrorist attacks in the database were rural attacks with few fatalities, a small number of injured individuals and low financial damage.

3. To determine the best model, we compare COLCAP market models using MSCI world index, SPX and IBOV as the market index. COLCAP~MSCI make the best fit, according to AIC, BIC and HQIC.

4. We choose a rather small event window in order to prevent confounding effects to permeate the results. Moreover, we do not include days prior to the event in our windows, since one could argue that anticipating terrorist attacks by FARC could be fairly difficult.