Financial Markets and Terrorism

Abstract

This paper uses daily data to analyze how stock and foreign exchange markets react to terror.

The data distinguishes location, type of attack and target, number of casualties, and the number of attacks per day for 639 terror attacks between 1990 and 2003 in which 1212 people in Israel were killed and 5726 people were maimed or injured. Suicide attacks had a permanent effect on both the stock and foreign exchange market, as did the numbers of victims, while location of a terror attack had no effect on either market. Markets did not become desensitized to terror. Financial markets continued to function efficiently; past market liberalization policies ostensibly contributed to coping with the terror. The conclusions, although based on terror against the population of Israel, have broader implications that extend to western societies because of Israel’s democratic regime, free markets, and well-developed financial markets.

Keywords: Terror; Terrorism; Israel; Efficient markets; Stock markets; September 11

JEL Classification: F31; G14; G15