Terrorism and stock market development: causality evidence from Pakistan
| Published date | 28 December 2012 |
| Date | 28 December 2012 |
| Pages | 116-128 |
| DOI | https://doi.org/10.1108/13590791311287364 |
| Author | Abdullah Alam |
| Subject Matter | Accounting & finance |
Terrorism and stock market
development: causality evidence
from Pakistan
Abdullah Alam
Department of Management Sciences,
International Islamic University Islamabad, Islamabad, Pakistan
Abstract
Purpose – The aim of this paper is to explore the relationship between terrorist activities in Pakistan
and the stock market development.
Design/methodology/approach – Using Terrorism Impact Factor (TIF), a unique score developed
for this paper, an insight is provided into the causal relationship that exists between terrorism and
Karachi Stock Exchange (KSE) index. Quantitative significance of the impact of terrorist activities on
stock index is also discussed in the paper.
Findings – Through the empirics of the study, it is analyzed that terrorism negatively impacts stock
market returns in the long run; whereas no significant relationship between stock market returns and
terrorism is estimated in the short run.
Research limitations/implications – A potential limitation of the study was the constraint related to
the available yearly economic growth and other economic variables’ data. The TIF created for the study was
based on the terrorist activities from 2001 to mid-2011 on an incident-to-incident basis. A yearly measure
would have provided 11 data points for the study, which are considered insufficient for econometric analysis.
Practical implications – It is recommended that governments pay particular attention to economic
recovery in the aftermath of terrorist attacks. Policies aimed at combating terrorism must be the
priority of the government, so that its harm can be reduced, if not exterminated.
Social implications – Terrorism, with its all kinds of impacts, affects the society and its activities
and therefore must be eliminated if an economy needs to prosper.
Originality/value – This study envisions the overall impact of terrorist activities, not just a single
activity, on the health of the economy. For studying this impact, a Terrorism Impact Factor (TIF) scale
has been developed for this study, based on the impact of each terrorist activity in the country.
Keywords Pakistan, Stockmarkets, Terrorism, Terrorism ImpactFactor (TIF),
Stock market develop ment
Paper type Research paper
I. Introduction
After the 9/11 attacks, Pakistan, being one of the foremost allies in the “war on terror”,
paid a high price. For the last decade or so, Pakistan has been the major target of
terrorist attacks. The number of terrorist activities in the country has risen from two in
2001 to 163 in 2010. Number of deaths and injuries owing to these terrorist activities in
Pakistan are graphed in Figure 1.
The government has failed to analyze the situation and its intensity, in the true sense.
Not much work has been done in order to investigate the root causes of terrorism and
the refinement of the government stance and policies in this regard. Pakistan’s economy
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1359-0790.htm
JEL classification – C22, K42, O16, O53
JFC
20,1
116
Journal of Financial Crime
Vol. 20 No. 1, 2013
pp. 116-128
qEmerald Group Publishing Limited
1359-0790
DOI 10.1108/13590791311287364
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