Terrorist attacks and oil prices: Hypothesis and empirical evidence

Abstract

Using a unique dataset that merges terrorism activity with oil prices, this paper develops and tests the hypothesis that terrorist attacks predict oil prices. We develop three insights. First, we show that terrorist attacks have a positive effect on oil prices, but it is attacks originating from oil producer countries that most influence oil prices. Second, we devise trading strategies based on terrorist attacks and show that attacks, by signaling buying and selling in the market, beat a buy-and-hold strategy. We also show that a mean–variance investor who utilizes our terrorism-based forecasting model makes economically meaningful profits. Our analysis also shows that the effect of terrorism on oil prices operates via both the oil production and oil investment channels.