The Impact of Terrorism on Financial Markets: An Empirical Study

48 Pages Posted: 28 Mar 2010

See all articles by Marc Chesney

Marc Chesney

University of Zurich - Department of Banking and Finance

Mustafa Karaman

University of Zurich - Swiss Banking Institute (ISB)

Ganna Reshetar

Deloitte AG

Date Written: March 28, 2010

Abstract

The main focus of this paper is to study empirically the impact of terrorism on the behavior of stock, bond and commodity markets. We consider terrorist events that took place in 25 countries over an 11 year time period and implement our analysis using different methods: an event-study approach, a non-parametric methodology, and a filtered GARCH-EVT approach. In addition, we compare the effect of terrorist attacks on financial markets with the impact of other extreme events such as financial crashes and natural catastrophes. The results of our analysis show that a non-parametric approach is the most appropriate method among the three for analyzing the impact of terrorism on financial markets. We demonstrate the robustness of this method when interest rates, equity markets integration, spillover and contemporaneous effects are controlled. We show how the results of this approach can be used for investors' portfolio diversification strategies against terrorism risk.

Keywords: Terrorism, Financial Markets, Event Study, Non-Parametric Methodology, Filtered GARCH-EVT Approach, Portfolio Diversification

JEL Classification: G14, G15, G18, G22, G28

Suggested Citation

Chesney, Marc and Karaman, Mustafa and Reshetar, Ganna, The Impact of Terrorism on Financial Markets: An Empirical Study (March 28, 2010). Available at SSRN: https://ssrn.com/abstract=1579674 or http://dx.doi.org/10.2139/ssrn.1579674

Marc Chesney

University of Zurich - Department of Banking and Finance ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland

HOME PAGE: http://https://www.bf.uzh.ch/en/persons/chesney-marc

Mustafa Karaman

University of Zurich - Swiss Banking Institute (ISB) ( email )

Plattenstrasse 32
Zurich, 8032
Switzerland

Ganna Reshetar (Contact Author)

Deloitte AG ( email )

Guisan-Quai 38
Zurich, 8002
Switzerland

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