Abstract
We study how terrorism impacts individual investor behavior. We utilize international brokerage data to study how individual investors react in the immediate aftermath of a terror attack. We focus on seven major terror attacks that occurred during the European terror attacks of 2015–2017. We find that investors lower their trading activity, use less leverage, and engage in less short selling. This effect is observed on a worldwide basis, with the effects being stronger in the country of attack. The changes in investor behavior can be explained by increased risk aversion and personal loss experiences. The decrease in trading activity leads to an increase in investors’ return on investments.
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