The effect of terror incidents on the yield of developing and developed markets

Abstract

Purpose The proliferation of terror threats in the past decades and the increasing number of terror incidents at different locations around the world have engendered a counter reaction from the members of the international community. This study aims to examine how terror incidents that happened over the past decade have affected the capital markets of the targeted countries and whether the effect was permanent or transitory. Design/methodology/approach To examine the incident’s effect, the study uses the TI (variable) index – a measure of pessimism with values ranging from 5 to 16 – for four days around a terrorist incident. By using this index, this study can reflect the investors’ level of pessimism resulting from the intensity of the terrorist incident. Five parameters that have a major influence on the incident’s severity have been used to construct the index. Findings By using the terror index, terror incidents were analyzed in four main tests. The results point at the following conclusions: There is a correlation between the yield index on the day of a terror incident and the two following work days. There is a negative correlation between the severity of the event and the yield indices. On the day of the terror incident, there is no difference in yield indices between large and small countries and between democratic and authoritarian countries. Developing countries, however, show a steeper decline than developed countries. In larger and developed countries, terror incidents are permanent, whereas in democratic countries, they are transitory. Originality/value This study investigates the effect of terrorism on the stock markets of different countries with relation to the country’s size, type of regime and level of development. The work is based on a unique sample of terror attacks. The study offers a quantitative index to measure the level of pessimism that contains different components of an incident, such as the location of the incident and the type of terrorism.