Terrorist Attacks and Investor Risk Preference: Evidence from Mutual Fund Flows
57 Pages Posted: 11 Apr 2019
Date Written: March 14, 2019
Using a comprehensive list of terrorist attacks over three decades, we find that aggregate investor risk aversion inversely relates to terrorist activity in the United States. A one standard deviation increase in the number of attacks each month leads to a $75.09 million drop in aggregate flows to equity funds and a $56.81 million increase to government bond funds. Tests on alternative channels further suggest that the shift in aggregate risk aversion is driven mainly by an emotional shock rather than changes in wealth or the outside environment. We also investigate possible alternate explanations for reduced flows to risky assets. Our evidence is consistent with a fear-induced increase in aggregate risk aversion.
Keywords: Terrorism, Risk Preference, Risk Aversion, Mutual Fund Flows
JEL Classification: G11, G14, H56
Suggested Citation: Suggested Citation