BEHIND THE SCENES OF TERROR - A study of the drivers behind the market reaction of terrorist attacks

Abstract: This paper investigates the underlying factors that cause negative market reaction from a terrorist attack. The data set examined includes 40 global terrorist attacks between 2000 and 2013 retrieved from the Global Terrorism Database. We find that one of the significant drivers behind the market reaction is the global reach of the event, e.g. how widely information and news about the attack is spread throughout the world. Moreover, the location of the attack proves to be a significant factor, where attacks taking place in advanced economy countries lead to higher negative returns on the stock market. On the contrary, the magnitude of the events, e.g. the fatalities of each event had no significant impact on the stock market. Plausible explanation of these results are discussed from a behavioral finance perspective, availability bias and weighing of evidence are theories that could explain these results. Furthermore the results indicate that even small scale terrorist attacks, could prove damaging for the stock market if spread virally through channels such as social media.