Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/119344
Authors: 
Drakos, Konstantinos
Year of Publication: 
2009
Series/Report no.: 
Economics of Security Working Paper 17
Abstract: 
The determinants of the cross-market transmission mechanism for terrorist shocks are explored, focusing on two major terrorist events and 68 national stock markets. We generate daily abnormal returns from a three-factor world asset pricing model. Abnormal returns are then regressed on proxies of three transmission mechanisms; a world integration channel,a bilateral integration channel, and a liquidity channel. Our findings indicate that terrorism shocks are diffused cross-nationally, and moreover this diffusion is non-uniform. We find empirical support for all three channels when considered separately. The bilateral integration channel contains the highest explanatory power since we find that a third country's trade linkages with the "ground-zero" country explain about 24 % of the stock market reaction. A country's share in the world trade, a proxy for the world integration channel, is able to explain about 12 % of abnormal return variation, while the liquidity channel exhibits the lowest predictive power, with the value of stock trading explaining about 6 %. A hybrid model, were proxies for all channels are included, shows that only the bilateral trade linkages with the "ground-zero" country are significant determinants of the stock market reaction.
Subjects: 
Linkages
Stock Market Return
Terrorism
JEL: 
F36
F32
G15
C21
C23
Document Type: 
Working Paper

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