The War on Terror - Terror on the Stock Market?

Abstract: This paper aims to investigate the effect of the major events of the U.S. War on Terror on the stock market. This is done by replicating an event study by Hudson and Urquhart (2015), which analyzes the effects of World War II events on the stock market returns. We develop a method to determine which major events that were most important in this war and investigate the relationship between the events and the S&P 500 returns by applying a parametric CAAR test and a nonparametric sign test. A careful categorization of events allows us to study the effects not only of war events in general, but also if events with certain characteristics affect stock market returns. The results indicate that intensifying events had a significant positive effect on the S&P 500 returns and thereby confirms previous findings by Schneider and Troeger (2006) that intensifying events has a positive effect on stock returns.