The effect of terror incidents on the yield of developing and developed markets

Publication Date03 May 2016
AuthorTchai Tavor
SubjectAccounting & Finance,Financial risk/company failure,Financial crime
The effect of terror incidents on
the yield of developing and
developed markets
Tchai Tavor
Department of Economics and Management,
The Max Stern Academic College of Emek Yezreel, Emek Yezreel, Israel
Purpose – The proliferation of terror threats in the past decades and the increasing number of terror
incidents at different locations around the world have engendered a counter reaction from the members
of the international community. This study aims to examine how terror incidents that happened over
the past decade have affected the capital markets of the targeted countries and whether the effect was
permanent or transitory.
Design/methodology/approach – To examine the incident’s effect, the study uses the TI (variable)
index – a measure of pessimism with values ranging from 5 to 16 – for four days around a terrorist
incident. By using this index, this study can reect the investors’ level of pessimism resulting from the
intensity of the terrorist incident. Five parameters that have a major inuence on the incident’s severity
have been used to construct the index.
Findings – By using the terror index, terror incidents were analyzed in four main tests. The results
point at the following conclusions: There is a correlation between the yield index on the day of a terror
incident and the two following work days. There is a negative correlation between the severity of the
event and the yield indices. On the day of the terror incident, there is no difference in yield indices
between large and small countries and between democratic and authoritarian countries. Developing
countries, however, show a steeper decline than developed countries. In larger and developed countries,
terror incidents are permanent, whereas in democratic countries, they are transitory.
Originality/value – This study investigates the effect of terrorism on the stock markets of different
countries with relation to the country’s size, type of regime and level of development. The work is based
on a unique sample of terror attacks. The study offers a quantitative index to measure the level of
pessimism that contains different components of an incident, such as the location of the incident and the
type of terrorism.
Keywords Market efciency, Permanent, Terror incidents, Terror index
Paper type Research paper
1. Introduction
Terrorism is a global threat, and has become, over the past decades, a problem that
almost every society has to face from time to time. Terrorism is a common weapon used
by terrorist groups for carrying out terror attacks of different measures in different
places in the world and against various populations, from soldiers to women and
children. Most of these organizations use a similar method of action to achieve their
political, ideological and religious goals. Many studies of terrorism have been carried
out in the elds of sociology, political science and history. However, since the terror
JEL classication – G14, G15
The current issue and full text archive of this journal is available on Emerald Insight at:
Effect of
Journalof Financial Crime
Vol.23 No. 2, 2016
©Emerald Group Publishing Limited
DOI 10.1108/JFC-10-2014-0046

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