How stock markets become desensitized to terror
| Date | 02 October 2017 |
| DOI | https://doi.org/10.1108/JFC-07-2016-0049 |
| Pages | 704-711 |
| Published date | 02 October 2017 |
| Author | Deniz Ilalan |
| Subject Matter | Accounting & Finance,Financial risk/company failure,Financial crime |
How stock markets become
desensitized to terror
Deniz Ilalan
Department of Banking and Finance, Çankaya Üniversitesi, Ankara, Turkey
Abstract
Purpose –A widely accepted belief indicatesthat terror activities have negative impact on stock markets.
Contrary to numerousempirical studies, the purpose of this paper is to considerthis issue from another point
of view in the sensethat markets can become desensitized to terror.
Design/methodology/approach –Here, instead of directly analyzing the existingdata, the stochastic
nature of the eventsis taken into consideration.
Findings –The author comparesthree countries and found out that the correlation between terror and stock
marketsis almost nil when terror events become a commonplace.
Originality/value –This paper applies meanreverting stochastic processes to terror incidents and brings
out interestingresults.
Keywords Stock returns, Mean reverting stochastic processes, Terrorist attacks
Paper type Research paper
1. Introduction
Terrorist activities thought to have a negative impact on the stock prices. This has been
witnessed on September 11 attacks, as it caused a US stock market shutdown which is followed
by a 7.1 per cent huge loss on the first day of its opening (Drakos, 2004). In fact, the
unpredictable nature of this event was crucial (Ilalan, 2016). Eldor and Melnick (2004) analyze
the impact of Palestinian terror attacks on stock market prices and exchange rates in Israel
using daily time series data from 1990 until 2003 and conclude that suicide attacks had a
permanent effect on both the stock and foreign exchange market, as did the numbers of
victims, while the location of a terror attack had no effect on either market. According to their
assertion, markets did not become desensitized to terror. Arin et al. (2008) claim that terrorist
attacks have an impact on stock markets and volatility where the magnitude is greater in
emerging markets. Chesney et al. (2011) consider terrorist events that took place in 25 countries
over an 11-year time period. They found out that approximately two-thirds of the terrorist
attacks considered lead to significant negative impact on at least one stock market under
consideration. Aslam and Kang (2015) say that terrorist attacks adversely affect the Pakistani
stock market. However, such effect is short lived, that is, the market recovers from terrorist
shocks in one day. Chen and Siems (2004) indicate that there is an increased market resilience to
terrorist attacks after 9/11 which could be explained by the stability of banking sector.
In this paper, we follow the idea proposed by Chen and Siems (2004) that markets can
indeed become desensitized to terror. However, we claim that this phenomenon has no
linkage with the strength of a particular sector.In fact, at some point, investors fully adjust
their expectation and long-termvaluation about terrorist attacks due to their high number of
JEL classification –C02, G10, G14
JFC
24,4
704
Journalof Financial Crime
Vol.24 No. 4, 2017
pp. 704-711
© Emerald Publishing Limited
1359-0790
DOI 10.1108/JFC-07-2016-0049
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