The Impact of Terrorist Attacks on Stock Returns and Volatility: Evidence from Colombo Stock Exchange

Abstract

This study examines the impact of terrorism on stock returns and volatility from an econometric perspective. Taking daily returns within the sample period May 1985-January 2007, the relevant hypotheses are tested in the context of the Colombo Stock Exchange. A GARCH specification is used to estimate parameters, thus explicitly allowing for the time-varying volatility effect. The attacks are chosen based on the number of civilians killed, whether the attacks are targeted at significant people or significant locations. The research results in a few important findings. First, there exists a significant relationship between the news of terrorist attacks and stock returns. Second, the relationship between the news of terrorist attacks and the volatility of stock returns is also significant when all types of attacks are put together, though the results are not very consistent when each type of attack is considered separately. Third, the study cites evidence in support of a weak learning effect over a time span of two decades.

Keywords: Terrorist Attacks, Stock Returns, Stock Market Volatility, GARCH Models

JEL Classification: G10, G12, G20