Terrorist Attacks and Investor Risk Preference: Evidence from Mutual Fund Flows

57 Pages Posted: 11 Apr 2019

See all articles by Yan Albert Wang

Yan Albert Wang

Auburn University

Michael Young

University of Missouri at Columbia - Department of Finance

Date Written: March 14, 2019

Abstract

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

Wang, Yan Albert and Young, Michael, Terrorist Attacks and Investor Risk Preference: Evidence from Mutual Fund Flows (March 14, 2019). Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=3354764

Yan Albert Wang

Auburn University ( email )

315 Lowder Hall
Department of Finance
Auburn, AL 36849
United States

Michael Young (Contact Author)

University of Missouri at Columbia - Department of Finance ( email )

Columbia, MO 65211
United States

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