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Regular version of the site

How Terrorist Attacks Hit Stock Markets

Terrorist attacks can have a paralysing effect on stock index dynamics, but market participants can cut their losses by not succumbing to panic.
Study authors:
Sergey Volodin, Associate Professor, Department of Finance, HSE Faculty of Economic Sciences.
Andrey Mikhalev, Analyst, HSE Laboratory of Financial Market Analysis.

Terrorist attacks can affect countries' stock markets: in 60% of cases, such attacks can cause stock indices to drop, but their impact is not necessarily substantial or long-lasting.

Most stock markets tend to recover within two days; therefore, selling stock at the peak of the panic may be an ill-conceived financial decision, according to Volodin and Mikhalev's paper 'Analysing the impact of terrorist attacks on stock index dynamics'*.

Stock Market Held at Gunpoint

The September 11 attacks in 2001 completely paralysed the U.S. stock market for a week. Over the six days following the attacks, the Dow Jones Industrial Average fell by 18% and then took more than six weeks to recover.

Yet the situation was significantly different after the terrorist attacks in Paris in 2015 and in Belgium in 2016. While domestic stock indices dropped instantly in both cases, they promptly recovered to their original values within 30 minutes in France and 2.5 hours in Belgium.

Having studied these and other examples of stock market dynamics after 117 major terrorist attacks since 1988, the researchers have concluded that despite negative assumptions, terrorist attacks do not always have a serious impact on stock markets.

They found that domestic stock indices declined following terrorist attacks in 60% of cases between 2006 and 2016, and in 80% of cases between 1988 and 2005. The researchers suggest that the recent decline in the impact on stock markets may be due to investors’ getting somewhat used to such incidents and reacting to them more rationally with less panic.

Indeed, by making adjustments for pre-existing downward trends in some stock indices, which were then aggravated – but not caused – by the attacks, the researchers found terrorist-induced decline only in 26% of cases.

What Determines Stock Market Reactions

Stock indices were found to respond differently to terrorist attacks depending on the day of the week: attacks occurring on weekdays caused indices to drop in 70% of cases versus just 50% of cases following attacks on weekends. According to the study authors, the main reason may be that on weekdays, market participants tend to react in a panic by selling off their stock immediately, while weekend attacks leave them some time to calm down and "overcome the initial shock" before they can act.

Stock markets in developing countries are generally less resistant to shocks: five of the six known cases of major stock-index collapses occurred in India and Turkey.

Countries with higher GDPs – such as the U.S., Israel and France – tend to withstand such shocks better. Their investors are less likely to be guided by public sentiment; it is also more difficult to impact a market with large capitalisation.

Terrorist attacks against nationals of a certain country abroad tend not to affect the country's stock market.

According to the researchers, the magnitude of attack seems to be an overestimated factor in terms of impact on stock indices: no relationship was found between the index dynamics and the number of victims. In fact, only the ten largest known terrorist attacks caused significant stock-index declines of 2.92% on average. 

Russian Specifics

The researchers examined specifically Russian trends in stock-index response to terrorist attacks by analysing the aftermaths of 44 attacks reported in Russia since 1999.

They found certain similarities with developing countries:

  • the Russian stock index (MICEX) dropped in 63.6% of cases (compared to 60.7% in other developing countries);
  • in 64% of cases (65% in developing countries), the decline was significant at 1% and more.

Some other indicators are similar between Russia and developed countries. Notably, how much the index might fall depends on the day of the week: 70% on weekdays versus 40% on weekends.

The geographic factor seems to be important for Russia as well as other countries: terrorist attacks in Moscow tend to have a stronger impact on the index than the national average and have caused the stock market to fall in 70% of cases, according to the study.

The MICEX usually needs more time to recover compared to its counterparts in some other countries: only in 57% of cases (compared to 73% elsewhere) did the Moscow Stock Exchange return to its pre-attack performance within two days. Indeed, following the 1999 apartment bombings in Dagestan, Moscow and the Rostov Region, the index took a full 29 trading days to recover.

Over the past ten years, the Russian stock index has been more likely than before to drop in response to terror attacks: in 67% of cases compared to 62% before 2006. The researchers observe, however, that the magnitude of such falls has declined at the same time. Rather than seeing it as a sign of socioeconomic stabilisation, they explain it by the fact that recently Russia has not seen major terror attacks of the same devastating impact as in the late 1990s.

*The study authors collected and analysed data on the 117 largest (killing 20 or more people) terrorist attacks that occurred between 1988 and 2016 in countries with different levels of stock market development.

They used the Database of Worldwide Terrorism Incidents and the Global Terrorism Database for terror attack data and Bloomberg and Eikon terminals, Yahoo Finance, and Finam for stock market data.

The stock market performance was measured using the following indices of countries included in the sample: D&J-Ind (USA), MICEX (Russia), FTSE-100 (Great Britain), CAC-40 (France), BSE500 (India), MXTR (Turkey), IBEX 35 (Spain), FTSE MIB (Italy), MERVAL (Argentina), TA-100 (Israel), S&P/TSX (Canada), Nikkei 225 (Japan), DAX (Germany), ASX 200 (Australia), CSI300 (China), OMXC20 (Denmark), OBX (Norway), BEL20 (Belgium), SOFIX (Bulgaria), and OMXS30B (Sweden).

Author: Svetlana Saltanova, May 30, 2017