Terrorism and Financial Markets: A North American and European Study

This paper investigates the impact of terrorism on financial markets in North America and Europe. This is done by investigating 22 attacks in 10 different countries from 2001 on. Stock indices are used as a proxy for financial markets. These indices consist of the major stock index of the country where an attack happened, the MSCI World and the MSCI Europe. An event study is performed by calculating both event day abnormal returns and cumulative abnormal returns. Robustness of the results is accounted for by using two different estimation windows and by using both normal and total returns. Results for event day abnormal returns show that attacks in the 2000s had highly significant negative impacts on stock indices, while these effects diminish for attacks in the 2010s. Furthermore, attacks of radical Islamic ideology and attacks on North American soil have the largest impacts on stock indices. Results for cumulative abnormal returns are inconsistent and fail robustness checks, and are thus inconclusive. Longer lasting impacts are thus not found. Conclusions are in accordance with existing literature in the sense that terrorist attacks indeed seem to have significantly negative short term impacts on financial markets. Nevertheless, most literature also found longer lasting impacts. While financial markets can be impacted by terrorist attacks in the short term, they seem to recover very quickly and are thus relatively efficient in absorbing the effects of such attacks.