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Terrorism activity, investor sentiment, and stock returns
Author(s) -
Drakos Konstantinos
Publication year - 2010
Publication title -
review of financial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.347
H-Index - 41
eISSN - 1873-5924
pISSN - 1058-3300
DOI - 10.1016/j.rfe.2010.01.001
Subject(s) - terrorism , heteroscedasticity , economics , stock (firearms) , empirical evidence , capital asset pricing model , stock market , econometrics , financial economics , monetary economics , autoregressive model , political science , law , mechanical engineering , paleontology , philosophy , epistemology , horse , biology , engineering
Motivated by the literature on investor sentiment and assuming that terrorist activity influences investor mood, in this paper we explore whether terrorism exerts a significant negative impact on daily stock market returns in a sample of 22 countries. The employed empirical specifications are based on flexible versions of the World CAPM, allowing for autoregressive conditional heteroscedasticity. The results suggest that terrorist activity leads to significantly lower returns on the day a terrorist attack occurs. In addition, the negative effect of terrorist activity is substantially amplified as the level of psychosocial effects increases. On the one hand, this evidence sheds light on the underlying mechanism via which terrorism affects stock markets while on the other hand, it provides further empirical support for the sentiment effect.