The impact of disasters and terrorism on the stock market.

Tchai Tavor,Sharon Teitler-Regev

doi:10.4102/jamba.v11i1.534

Tchai Tavor, Sharon Teitler-Regev

Open Access

https://doi.org/10.4102/jamba.v11i1.534

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Abstract

The growing number of negative events worldwide, among them natural disasters, artificial disasters and terrorism, has led the public to focus attention on the impact of such events on the economy and the capital market. This research examines the effects of natural disasters, artificial disasters and terrorism on the stock market in order to reveal profit opportunities. In this research, we collected data on 344 significant events that received media attention and examined the differences between the three types of events using the Pessimism Index. Some of the results include the following: (1) natural disasters cause the greatest damage to the economy, whereas terrorism causes the least damage; (2) natural disasters exhibit the highest level of severity, whereas artificial disasters have the lowest severity. The research reveals some opportunities for investors to obtain arbitrage profits. During natural disasters, the stock index decreases on the day of the events and on the two subsequent days. Therefore, investors should short sell the index on the day of the disaster and hold it for 2 days. On the contrary, during artificial disasters or terrorist incidents, the index drops only on the day of the event and the next day, so investors should short sell the index on the day of the disaster and hold it until the end of the first working day following the incident.

Highlights

The growing number of natural disasters, artificial disasters1 and terrorist incidents around the world has led the public to focus attention on the impact of these events on various economic activities and on the growth of the global economy
In examining the ways and abilities to cope with natural disasters, it is important to distinguish between developed countries that invest major sums of money in dealing with the hazards of nature and developing countries that have no budget for coping with such hazards
The main focus of this research was to examine the effects on the capital market of three types of events: natural disasters, artificial disasters and terrorism

Summary

Introduction

The growing number of natural disasters, artificial disasters and terrorist incidents around the world has led the public to focus attention on the impact of these events on various economic activities and on the growth of the global economy. In examining the ways and abilities to cope with natural disasters, it is important to distinguish between developed countries that invest major sums of money in dealing with the hazards of nature and developing countries that have no budget for coping with such hazards

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