IDEAS home Printed from https://ideas.repec.org/p/diw/diweos/diweos8.html
   My bibliography  Save this paper

Big Questions, Little Answers: Terrorism Activity, Investor Sentiment and Stock Returns

Author

Listed:
  • Konstantinos Drakos

Abstract

Motivated by the investor sentiment literature and assuming that terrorist activity influences investor mood the paper explores whether terrorism exerts a significant negative impact on daily stock market returns for a sample of 22 countries. The employed empirical specifications are based on flexible versions of the World CAPM allowing for autoregressive conditional heteroscedasticity. The results suggest that terrorist activity leads to significantly lower returns on the day of terrorist attack occurrence. In addition, the negative effect of terrorist activity is substantially amplified as the level of psychosocial effects increases. On the one hand this evidence sheds light to the underlying mechanism via which terrorism affects stock markets while on the other hand provides further empirical support for the sentiment effect.

Suggested Citation

  • Konstantinos Drakos, 2009. "Big Questions, Little Answers: Terrorism Activity, Investor Sentiment and Stock Returns," Economics of Security Working Paper Series 8, DIW Berlin, German Institute for Economic Research.
    • Handle: RePEc:diw:diweos:diweos8
    as

    Download full text from publisher

    File URL: https://www.diw.de/documents/publikationen/73/diw_01.c.95740.de/diw_econsec0008.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Cao, Melanie & Wei, Jason, 2005. "Stock market returns: A note on temperature anomaly," Journal of Banking & Finance, Elsevier, vol. 29(6), pages 1559-1573, June.
    2. Lisa A. Kramer & Mark J. Kamstra & Maurice D. Levi, 2000. "Losing Sleep at the Market: The Daylight Saving Anomaly," American Economic Review, American Economic Association, vol. 90(4), pages 1005-1011, September.
    3. Charles, Amelie & Darne, Olivier, 2006. "Large shocks and the September 11th terrorist attacks on international stock markets," Economic Modelling, Elsevier, vol. 23(4), pages 683-698, July.
    4. David Hirshleifer & Tyler Shumway, 2003. "Good Day Sunshine: Stock Returns and the Weather," Journal of Finance, American Finance Association, vol. 58(3), pages 1009-1032, June.
    5. Saunders, Edward M, Jr, 1993. "Stock Prices and Wall Street Weather," American Economic Review, American Economic Association, vol. 83(5), pages 1337-1345, December.
    6. Drakos, Konstantinos, 2004. "Terrorism-induced structural shifts in financial risk: airline stocks in the aftermath of the September 11th terror attacks," European Journal of Political Economy, Elsevier, vol. 20(2), pages 435-446, June.
    7. Robert J. Shiller, 2003. "From Efficient Markets Theory to Behavioral Finance," Journal of Economic Perspectives, American Economic Association, vol. 17(1), pages 83-104, Winter.
    8. Jeffrey Jaffe & R. Westerfield, "undated". "The Week-End Effect in Common Stock Returns: The International Evidence," Rodney L. White Center for Financial Research Working Papers 3-85, Wharton School Rodney L. White Center for Financial Research.
    9. Choudhry, Taufiq, 2001. "Month of the Year Effect and January Effect in Pre-WWI Stock Returns: Evidence from a Non-linear GARCH Model," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 6(1), pages 1-11, January.
    10. Jaffe, Jeffrey F & Westerfield, Randolph, 1985. "The Week-End Effect in Common Stock Returns: The International Evidence," Journal of Finance, American Finance Association, vol. 40(2), pages 433-454, June.
    11. David Hirshleifer, 2001. "Investor Psychology and Asset Pricing," Journal of Finance, American Finance Association, vol. 56(4), pages 1533-1597, August.
    12. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
    13. Chen, Andrew H. & Siems, Thomas F., 2004. "The effects of terrorism on global capital markets," European Journal of Political Economy, Elsevier, vol. 20(2), pages 349-366, June.
    14. Kato, Kiyoshi & Schallheim, James S., 1985. "Seasonal and Size Anomalies in the Japanese Stock Market," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 20(2), pages 243-260, June.
    15. Alex Edmans & Diego García & Øyvind Norli, 2007. "Sports Sentiment and Stock Returns," Journal of Finance, American Finance Association, vol. 62(4), pages 1967-1998, August.
    16. Jeffrey Jaffe & R. Westerfield, "undated". "The Week-End Effect in Common Stock Returns: The International Evidence," Rodney L. White Center for Financial Research Working Papers 03-85, Wharton School Rodney L. White Center for Financial Research.
    17. Carter, David A. & Simkins, Betty J., 2004. "The market's reaction to unexpected, catastrophic events: the case of airline stock returns and the September 11th attacks," The Quarterly Review of Economics and Finance, Elsevier, vol. 44(4), pages 539-558, September.
    18. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    19. Gibbons, Michael R & Hess, Patrick, 1981. "Day of the Week Effects and Asset Returns," The Journal of Business, University of Chicago Press, vol. 54(4), pages 579-596, October.
    20. Nikkinen, Jussi & Omran, Mohammad M. & Sahlstrom, Petri & Aijo, Janne, 2008. "Stock returns and volatility following the September 11 attacks: Evidence from 53 equity markets," International Review of Financial Analysis, Elsevier, vol. 17(1), pages 27-46.
    21. Fama, Eugene F & French, Kenneth R, 1996. "Multifactor Explanations of Asset Pricing Anomalies," Journal of Finance, American Finance Association, vol. 51(1), pages 55-84, March.
    22. Abadie, Alberto & Gardeazabal, Javier, 2008. "Terrorism and the world economy," European Economic Review, Elsevier, vol. 52(1), pages 1-27, January.
    23. Stracca, Livio, 2004. "Behavioral finance and asset prices: Where do we stand?," Journal of Economic Psychology, Elsevier, vol. 25(3), pages 373-405, June.
    24. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Kollias, Christos & Papadamou, Stephanos & Stagiannis, Apostolos, 2011. "Terrorism and capital markets: The effects of the Madrid and London bomb attacks," International Review of Economics & Finance, Elsevier, vol. 20(4), pages 532-541, October.
    2. Randall K. Filer & Dragana Stanišić, 2016. "The Effect of Terrorist Incidents on Capital Flows," Review of Development Economics, Wiley Blackwell, vol. 20(2), pages 502-513, May.
    3. Gardeazabal, Javier, 2010. "Methods for Measuring Aggregate Costs of Conflict," DFAEII Working Papers 1988-088X, University of the Basque Country - Department of Foundations of Economic Analysis II.
    4. Michael Brzoska & Raphael Bossong & Eric van Um, 2011. "Security Economics in the European Context: Implications of the EUSECON Project," Economics of Security Working Paper Series 58, DIW Berlin, German Institute for Economic Research.
    5. Irshad Hira & Taib Hasniza Mohd & Hussain Haroon & Hussain Rana Yassir, 2023. "Conventional and Islamic Equity Market Reaction Towards Terrorism: Evidence Based on Target Types, Location and Islamic Calendar Months," Studia Universitatis „Vasile Goldis” Arad – Economics Series, Sciendo, vol. 33(4), pages 70-116, December.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Konstantinos Drakos, 2010. "Terrorism activity, investor sentiment, and stock returns," Review of Financial Economics, John Wiley & Sons, vol. 19(3), pages 128-135, August.
    2. Konstantinos Drakos, 2011. "Behavioral Channels in the Cross‐Market Diffusion of Major Terrorism Shocks," Risk Analysis, John Wiley & Sons, vol. 31(1), pages 143-159, January.
    3. Konstantinos Drakos, 2009. "Cross-Country Stock Market Reactions to Major Terror Events: The Role of Risk Perception," Economics of Security Working Paper Series 16, DIW Berlin, German Institute for Economic Research.
    4. Konstantinos Drakos, 2010. "The determinants of terrorist shocks' cross‐market transmission," Journal of Risk Finance, Emerald Group Publishing Limited, vol. 11(2), pages 147-163, March.
    5. Kim, Jae H. & Shamsuddin, Abul, 2023. "Stock market anomalies: An extreme bounds analysis," International Review of Financial Analysis, Elsevier, vol. 90(C).
    6. Hudson, Robert & Urquhart, Andrew, 2015. "War and stock markets: The effect of World War Two on the British stock market," International Review of Financial Analysis, Elsevier, vol. 40(C), pages 166-177.
    7. Birru, Justin, 2018. "Day of the week and the cross-section of returns," Journal of Financial Economics, Elsevier, vol. 130(1), pages 182-214.
    8. Kaplanski, Guy & Levy, Haim, 2010. "Exploitable Predictable Irrationality: The FIFA World Cup Effect on the U.S. Stock Market," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 45(2), pages 535-553, April.
    9. Chang, Shao-Chi & Chen, Sheng-Syan & Chou, Robin K. & Lin, Yueh-Hsiang, 2008. "Weather and intraday patterns in stock returns and trading activity," Journal of Banking & Finance, Elsevier, vol. 32(9), pages 1754-1766, September.
    10. Massimiliano Castellani & Pierpaolo Pattitoni & Roberto Patuelli, 2015. "Abnormal Returns of Soccer Teams," Journal of Sports Economics, , vol. 16(7), pages 735-759, October.
    11. Kiymaz, Halil & Berument, Hakan, 2003. "The day of the week effect on stock market volatility and volume: International evidence," Review of Financial Economics, Elsevier, vol. 12(4), pages 363-380.
    12. Paul Alagidede & Theodore Panagiotidis, 2006. "Calendar Anomalies in an Emerging African Market: Evidence from the Ghana Stock Exchange," Discussion Paper Series 2006_13, Department of Economics, Loughborough University, revised Jun 2006.
    13. Kollias, Christos & Manou, Efthalia & Papadamou, Stephanos & Stagiannis, Apostolos, 2011. "Stock markets and terrorist attacks: Comparative evidence from a large and a small capitalization market," European Journal of Political Economy, Elsevier, vol. 27(S1), pages 64-77.
    14. Alex Edmans & Diego García & Øyvind Norli, 2007. "Sports Sentiment and Stock Returns," Journal of Finance, American Finance Association, vol. 62(4), pages 1967-1998, August.
    15. Rayenda Brahmana & Chee-Wooi Hooy & Zamri Ahmad, 2012. "Weather, investor irrationality and day-of-the-week anomaly: case of Indonesia," Journal of Bioeconomics, Springer, vol. 14(2), pages 129-146, July.
    16. Qadan, Mahmoud & Kliger, Doron, 2016. "The short trading day anomaly," Journal of Empirical Finance, Elsevier, vol. 38(PA), pages 62-80.
    17. Lepori, Gabriele M., 2015. "Investor mood and demand for stocks: Evidence from popular TV series finales," Journal of Economic Psychology, Elsevier, vol. 48(C), pages 33-47.
    18. Adam Zaremba & Jacob Koby Shemer, 2018. "Price-Based Investment Strategies," Springer Books, Springer, number 978-3-319-91530-2, June.
    19. Subadar Agathee Ushad, 2009. "Seasonality, returns and volatility on the Stock Exchange of Mauritius," Applied Economics Letters, Taylor & Francis Journals, vol. 16(5), pages 545-548.
    20. Mehmet Dicle & John Levendis, 2014. "The day-of-the-week effect revisited: international evidence," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 38(3), pages 407-437, July.

    More about this item

    Keywords

    Sentiment; Terrorism; Stock Market; Panel; Pooled Panel ARCH;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:diw:diweos:diweos8. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Bibliothek (email available below). General contact details of provider: https://edirc.repec.org/data/diwbede.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.