Terrorist Attacks, Saber Rattling, Other Crisis Events and American Depository Receipt Returns and Volatility: If We Stop Shopping, the Evil Doers Win

Abstract

I examine the impact of 51 terrorist attacks, three wars, an assassination, and other national security-related shocks on the returns of American Depository Receipts (ADRs). ADRs are securities that trade on American markets that entitle investors to the cash flows (denominated in dollars) of foreign firms. I find that small-scale terrorist attacks that receive little media attention do not affect ADR returns. Large scale terrorist attacks, the assassination of Benazir Bhutto, highly provocative actions by North Korea, and small-scale wars affect ADR returns while natural disasters do not. The negative effect on ADRs is short lived. I also examine the volatility structures of two ADR indexes (Korea and India) and their underlying home market indexes. I find that there is bi-directional information flow between the ADR markets and the home market indexes. I find evidence that various political shocks affect the volatility structures of these indexes, both ADR and home market indexes.