The Impact of Terrorism and Anti-Terrorism on Capital Markets

This paper investigates the effect of continuous terror attacks and anti-terrorism policy on stock and bond markets and on the risk premium required by investors. The empirical findings are based on a unique sample of 280 terror events experienced in Israel and 58 targeted killings carried out as anti-terrorism policy during the Intifada years, 2000-2003. Based on daily and intra-daily data of share prices and an index of terror intensity, our main findings are: i) share prices declined by about 0.48% on average following each terror attack but the decline in share prices was due to continued deterioration in expected future cash flows and not due to increased risk premium; ii) anti-terrorism policy had an insignificant effect on share prices; iii) short-term government bonds substituted for investment in stocks in response to terror attacks.