The purpose of this study was to examine the impact of terrorism on stock market volatility. Using non-linear BEKK-GARCH type model, this study investigates the effect of 16 terrorist attacks, which have occurred in USA and in Western Europe, on the variance and the covariance of three major indexes -S&P500,CAC40 and DAX. The time period we took into consideration was between March 1990 until December 2017. The main findings indicate that there is a positive and statistically significant effect on the volatilities of all three markets. However, any negative effects are clearly short lived. The S&P500 it appears to be more resilient than the Europeans indexes, which can be partially explained by a stable banking/financial sector that provides adequate liquidity to promote market stability. The analysis also indicates that the impact of terrorist attacks differs according to the country in which the incident occurred. We found that attacks which took place in USA influence all three markets on the contrary attacks which occurred in Western Europe effects only the European ones. There is also evidence that the covariance between the European stocks returns really increase during turbulent periods. In contrast, the covariance is not affected in a statistically significant manner or is reduced for the couple of U.S-European indexes.

1. University of Macedonia
Department of Economics
The Impact of Terrorist Attacks on Stock Markets Volatility
by
Koullolli Ntenis
Thessaloniki, March 2018

2. Outline
• Introduction
• Review of Literature
• Aims and Objectives
• Data Presentation
• Econometric Analysis
• Results
• Conclusions
• Summary
MSc in Economics - University of Macedonia 2

3. Introduction
• What is Terrorism?
o There are more than 100 definitions of Terrorism
o Nearly all of them take it that terrorism is, or involves, the use of indiscriminate
violence in order to achieve political goals
o START defines a terrorist attack as the threatened or actual use of illegal force and
violence by a non-state actor to attain a political, economic, religious, or social goal
through fear, coercion, or intimidation
• Terrorism is a dynamic phenomenon that develops over time
• Terrorism is consider to be one of the main threats to international peace
and security
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4. Review of Literature (I)
Economic Consequences
• Direct Costs
o Short-Term and relatively small in relation to the size of the economy
o Destruction of human and physical capital (Buesa et al., 2007)
• Indirect Costs
o Significant mid- and long- term effects on:
o Consumption and Saving (Eckstein & Tsiddon, 2004)
o Growth rate (Blomberg et al., 2004; Abadie & Gardeazabal, 2003)
o International trade (Nitsch & Schumacher, 2004 )
o FDI (Enders et al., 2006)
o Tourism (Llorca-Vivero, 2008)
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5. Review of Literature (II)
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Author Description Findings
Chen & Siems (2004), Richman (2005) They examine the effects of 9/11 on global markets Terrorist attacks affect capital markets around the world in a short period of time
Hon et al., (2004)
They test whether the terrorist attacks of 9/11 resulted in a
contagion - an increase in correlation across global financial
markets
Results indicate that international stock markets, particularly in Europe, responded
more closely to U.S. stock market shocks in the three to six months after the crisis
than before
Chesney et al., (2011)
They study the effects of 77 terrorist attacks on European,
American and Swiss markets
Approximately two-thirds of the terrorist attacks considered lead to significant
negative impact on at least one stock market under consideration. The Swiss stock
market is affected by the highest number of attacks, the American stock market by
the lowest. The airline industry and insurance sector exhibit the highest
susceptibility to terrorism, while the banking industry is the least sensitive
Nikkinen & Vähämaa (2010)
They examine the effects of terrorism on stock market
sentiment
They find that terrorism has a strong adverse impact on stock market sentiment
Kollias et al., (2013)
They investigate the cross-market transmission of the
London Stock Exchange’s reaction to the terrorist attacks of
2005. They mainly focuse on how this reaction was
transmitted to two other major European stock exchanges:
Frankfurt and Paris
Findings reported herein indicate that the volatility of stock market returns is
increased in all examined cases
Essadam & Mnasri (2015)
They examine the impact of terrorism on volatility of stock
returns over 17 market indices between 1994 and 2005
Results indicate that terrorism has a significant impact on the stock market volatility

6. Aims and Objectives
• The purpose of this study is to examine the impact of terrorist attacks on
the variance and the covariance of three major indexes -S&P500,CAC40
and DAX
• The attacks are categorized in two main groups by the place in which have
occurred (or the country which is the main target)
• Western Europe and USA
• Two different event windows are used in this study
• -/+ 2 and -/+5 days
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7. Data Presentation
Two types of data sets are used in this study
The first data set includes information on terrorist events
• We consider the 16 most severe terrorist events which took place in 8 countries from March 1990 until
December 2017
• The database is constructed using information from GTD, RAND and by own research
• These attacks are: New York (1993, 2001), Oklahoma (1995), Manchester (1996, 2017), Nairobi and Dar
es Salaam (1998), Atlanta (1998), Madrid (2004), London (2005), Oslo (2011), Boston (2013), Paris (2015),
Brussels (2016), Nice (2016), Orlando (2016), Barcelona (2017)
The second data set includes daily prices of financial market indices
• Daily data (7261 observations)
• The data is taken from Yahoo Finance
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8. Data Presentation
Search and selection process for the attacks in 2017
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Searching for the terms “Terrorism”
and “Terrorist Attack” for each
country and gathering the relevant
articles
Testing the validity and reliability of
the collected articles
Recording the number of victims
for each attack
An event is considered as terrorist
attack when at least two of three
START’s criteria are met

9. Data Presentation
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10. Data Presentation
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-.06
-.04
-.02
.00
.02
.04
.06
1995 2000 2005 2010 2015
DLSP500
.0000
.0005
.0010
.0015
.0020
.0025
1995 2000 2005 2010 2015
DLSP500 Sqrt.
-.06
-.04
-.02
.00
.02
.04
.06
1995 2000 2005 2010 2015
DLCAC40
.0000
.0005
.0010
.0015
.0020
.0025
1995 2000 2005 2010 2015
DLCAC40 Sqrt.
-.06
-.04
-.02
.00
.02
.04
.06
1995 2000 2005 2010 2015
DLDAX
.0000
.0005
.0010
.0015
.0020
.0025
1995 2000 2005 2010 2015
DLDAXSqrt.

11. Econometric Analysis
BEKK-GARCH based on Kollias et al., (2013)
Ri,t = μi + εi,t (1) with εt| Φt−1~ N(0, Ht)
We d𝑒𝑓𝑖𝑛𝑒 ω(𝑖)t =
0 𝑖𝑓 𝑛𝑜𝑡 𝑎𝑡𝑡𝑎𝑐𝑘 𝑜𝑐𝑐𝑢𝑟𝑠
εt 𝑖𝑓 𝑎𝑛 𝑎𝑡𝑡𝑎𝑐𝑘 𝑜𝑐𝑐𝑢𝑟𝑠
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Ht = C′
0 C0 + Γ′11εt−1ε′
t−1Γ11 + B′11Ht−iΒ11 (2)
Ht = C′
0 C0 + Γ′11εt−1ε′
t−1 𝛤11 + B′11Ht−iΒ11 + D′11ωt−1ω′
t−1D11 (3)
Ht =
𝑐11 0
𝑐21 𝑐22
′
𝑐11 0
𝑐21 𝑐22
+
𝛾11 𝛾12
𝛾21 𝛾22
′
εt−1ε′
t−1
𝛾11 𝛾12
𝛾21 𝛾22
+
𝛽11 𝛽12
𝛽21 𝛽22
′
Ht−1
𝛽11 𝛽12
𝛽21 𝛽22
+
𝑑11 𝑑12
𝑑21 𝑑22
′
ωt−1ω′
t−1
𝑑11 𝑑12
𝑑21 𝑑22
(4)

12. Econometric Analysis
MSc in Economics - University of Macedonia 12

13. Results
C0, Γ11& 𝐵11 are positive definite matrices
c11, γ11& 𝛽11 > 0 and statistically significant
o C0 , Γ11 και 𝐵11 > 0
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Matrices Determinant Coefficient Value t-statistic Matices Determinant Coefficient Value t-statistic
-/+2 days
W
e
s
t
e
r
n
E
u
r
o
p
e
S&P500- CAC 40
2.32E-07 0.00 21.55
USA
S&P500- CAC 40
2.45E-07 0.0005 21.614
6.58E-02 0.25 32.992 6.64E-02 0.2497 31.922
9.24E-01 0.96 434.253 9.22E-01 0.9588 420.964
S&P500-DAX
2.42E-07 0.00 22.382
S&P500-DAX
2.54E-07 0.0005 23.072
6.53E-02 0.27 37.909 6.57E-02 0.267 35.005
9.22E-01 0.96 414.884 9.19E-01 0.9537 397.364
S&P500- CAC 40
1.02E-07 0.00 23.539
S&P500- CAC 40
1.08E-07 0.0007 24.007
6.46E-02 0.23 26.714 6.44E-02 0.2245 25.766
9.28E-01 0.97 828.669 9.27E-01 0.9686 818.491
-/+5 days
S&P500- CAC 40
2.30E-07 0.00 21.338
S&P500- CAC 40
2.45E-07 0.0005 21.533
6.56E-02 0.25 32.796 6.60E-02 0.2519 32.241
9.25E-01 0.96 433.629 9.22E-01 0.9585 421.801
S&P500-DAX
2.41E-07 0.00 22.336
S&P500-DAX
2.52E-07 0.0005 23.012
6.52E-02 0.27 37.847 6.53E-02 0.2672 35.106
9.22E-01 0.96 415.686 9.20E-01 0.9539 399.975
S&P500- CAC 40
1.01E-07 0.00 23.617
S&P500- CAC 40
1.08E-07 0.0007 23.966
6.49E-02 0.22 26.581 6.47E-02 0.2234 25.552
9.27E-01 0.97 828.201 9.27E-01 0.9685 812.459
Values in italics denote statistical significance at a = 5%

14. Results
• There is a positive and statistically significant relationship between terrorist attacks
and stock market volatility
• The effects appears to be smaller on -/+ 5 window
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GROUP S&P 500-CAC 40 S&P 500-DAX CAC 40-DAX
COV Var1 Var2 COV Var1 Var2 COV Var1 Var2
Total
2 days ↓ ↑ ↑ ↑ ↑ ↑ ↑ ↑ ↑
5 days ↓ ↑ ↑ ↓ ↑ ↑ ↑ ↑ ↑
Western
Europe
2 days   ↑   ↑ ↑ ↑ ↑
5 days      ↑ ↑ ↑ ↑
USA
2 days ↓ ↑ ↑ ↓ ↑  ↑ ↑ ↑
5 days ↓ ↑ ↑ ↓ ↑ ↑ ↑ ↑ ↑
The arrows denote how the attacks affect the variances and covariances of the market. More pronounced effects are represented by
bold arrows. Dashes show that there is no direct and statistically significant relationship.

15. MSc in Economics - University of Macedonia 15
.0000050
.0000100
.0000150
.0000200
.0000250
.0000300
.0000350
.0000400
.0000450
I II III IV I II III IV
2004 2005
VAR CAC 40 (i = Te -/+2)
VAR CAC 40 (i = Te -/+5)
VAR CAC 40 (i =0)
.00000
.00001
.00002
.00003
.00004
.00005
.00006
IV I II III IV I II III IV
2004 2005
VAR DAX (i = Te -/+2)
VAR DAX (i = Te -/+5)
VAR DAX (i = 0)
.00001
.00002
.00003
.00004
.00005
.00006
.00007
.00008
.00009
M9 M10 M11 M12 M1 M2 M3 M4 M5
2015 2016
VAR CAC 40 (i = Te -/+2)
VAR CAC 40 (i = Te -/+5)
VAR CAC 40 (i =0)
.00002
.00003
.00004
.00005
.00006
.00007
.00008
.00009
.00010
.00011
M8 M9 M10 M11 M12 M1 M2 M3 M4 M5
2015 2016
VAR DAX (i = Te -/+2)
VAR DAX (i = Te -/+5)
VAR DAX (i = 0)

16. Results
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GROUP S&P 500-CAC 40 S&P 500-DAX CAC 40-DAX
COV Var1 Var2 COV Var1 Var2 COV Var1 Var2
Total
2 days ↓ ↑ ↑ ↑ ↑ ↑ ↑ ↑ ↑
5 days ↓ ↑ ↑ ↓ ↑ ↑ ↑ ↑ ↑
Western
Europe
2 days   ↑   ↑ ↑ ↑ ↑
5 days      ↑ ↑ ↑ ↑
USA
2 days ↓ ↑ ↑ ↓ ↑  ↑ ↑ ↑
5 days ↓ ↑ ↑ ↓ ↑ ↑ ↑ ↑ ↑
The arrows denote how the attacks affect the variances and covariances of the market. More pronounced effects are represented by
bold arrows. Dashes show that there is no direct and statistically significant relationship.
• Terrorist attacks which have occurred in Western Europe do not affect in a statistically significant
manner the S&P500 index
• Terrorist attacks which have occurred in USA affect in a statistically significant manner all three
indexes
• European indexes seems to be more affected

17. MSc In Economics - University of Macedonia 17
.0000
.0001
.0002
.0003
.0004
.0005
1995 2000 2005 2010 2015
VAR S&P 500 (i = 0)
.0000
.0001
.0002
.0003
.0004
.0005
1995 2000 2005 2010 2015
VAR DAX (i = 0)
.0000
.0001
.0002
.0003
.0004
.0005
1995 2000 2005 2010 2015
VAR S&P 500 (i = Tu -/+2)
.0000
.0001
.0002
.0003
.0004
.0005
1995 2000 2005 2010 2015
VAR DAX (i = Tu -/+2)
.0000
.0001
.0002
.0003
.0004
.0005
1995 2000 2005 2010 2015
VAR S&P 500 (i = Tu -/+5)
.0000
.0001
.0002
.0003
.0004
.0005
1995 2000 2005 2010 2015
VAR DAX (i = Tu -/+5)

18. Results
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GROUP S&P 500-CAC 40 S&P 500-DAX CAC 40-DAX
COV Var1 Var2 COV Var1 Var2 COV Var1 Var2
Total
2 days ↓ ↑ ↑ ↑ ↑ ↑ ↑ ↑ ↑
5 days ↓ ↑ ↑ ↓ ↑ ↑ ↑ ↑ ↑
Western
Europe
2 days   ↑   ↑ ↑ ↑ ↑
5 days      ↑ ↑ ↑ ↑
USA
2 days ↓ ↑ ↑ ↓ ↑  ↑ ↑ ↑
5 days ↓ ↑ ↑ ↓ ↑ ↑ ↑ ↑ ↑
The arrows denote how the attacks affect the variances and covariances of the market. More pronounced effects are represented by
bold arrows. Dashes show that there is no direct and statistically significant relationship.
• The covariance between the German and French stock indexes increases when a terrorist attack
occurs
• The covariance between the American and European stock indexes decreases when a terrorist
attack occurs

19. MSc In Economics - University of Macedonia 19
.0000
.0001
.0002
.0003
.0004
.0005
90 92 94 96 98 00 02 04 06 08 10 12 14 16
C O V C AC 40- DAX (i = 0)
.0000050
.0000100
.0000150
.0000200
.0000250
.0000300
.0000350
M1 M2 M3 M4 M5 M6 M7 M8 M9 M10 M11 M12
1995
C O V C AC 40- DAX (i = Tu -/+ 2)
C O V C AC 40- DAX (i = Tu -/+ 5)
C O V C AC 40- DAX (i = 0)
.0000
.0001
.0002
.0003
.0004
.0005
90 92 94 96 98 00 02 04 06 08 10 12 14 16
COV CAC 40- DAX (i = Tu -/+ 2)
.00000
.00005
.00010
.00015
.00020
.00025
.00030
.00035
M3 M4 M5 M6 M7 M8 M9 M10 M11 M12
2001
C O V C AC 40- DAX (i = Tu -/+ 2)
C O V C AC 40- DAX (i = Tu -/+ 5)
C O V C AC 40- DAX (i = 0)
.0000
.0001
.0002
.0003
.0004
.0005
90 92 94 96 98 00 02 04 06 08 10 12 14 16
COV CAC 40- DAX (i = Tu -/+ 5)
.00000
.00002
.00004
.00006
.00008
.00010
.00012
.00014
M3 M4 M5 M6 M7 M8 M9 M10
2016
C O V C AC 40- DAX (i = Tu -/+ 2)
C O V C AC 40- DAX (i = Tu -/+ 5)
C O V C AC 40- DAX (i = 0)

20. Conclusions
• The main findings indicate that there is a positive and statistically significant effect on
the volatilities of all three markets
• However, any negative effects are clearly short lived
• The S&P500 index appears to be more resilient than the Europeans indexes
• The attacks which took place in USA influence all three markets, on the contrary
attacks which occurred in Western Europe effects only the European ones
• Financial integration appears to contribute in the transmission of uncertainty and the
diffusion of volatility
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21. Summary
• The findings are useful for understanding the behavior of markets
during unpredictable events
• Risk associated with the threat of terrorism should be taken into
account when modeling the variability
• The diversifications benefits seem to be reduced during periods
of turbulence
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22. Indicative Bibliography
Abadie, A., & Gardeazabal, J. (2008). Terrorism and the world economy. European Economic Review, 52(1), 1-27. ISO 690
Blomberg, S. B., Hess, G. and Weerapana, A. (2004) Economic conditions and terrorism. European Journal of Political Economy 20: 463–478.
Buesa, M., Valiño, A., Heijs, J., Baumert, T., & Gomez, J. G. (2007). The Economic Cost of March 11: Measuring the direct economic cost of the terrorist
attack on March 11, 2004 in Madrid. Terrorism and Political Violence, 19(4), 489-509.
Chen, A. H., & Siems, T. F. (2004). The effects of terrorism on global capital markets. European journal of political economy, 20(2), 349-366.
Chesnay, F., & Jondeau, E. (2001). Does correlation between stock returns really increase during turbulent periods?. Economic Notes, 30(1), 53-80.
Enders, W., Sandler, T., & Parise, G. F. (1992). An econometric analysis of the impact of terrorism on tourism. Kyklos, 45(4), 531-554.
Essaddam, N., & Mnasri, A. (2015). Event-study volatility and bootstrapping: an international study. Applied Economics Letters, 22(3), 209-213.
Hon, M. T., Strauss, J., & Yong, S. K. (2004). Contagion in financial markets after September 11: myth or reality?. Journal of Financial Research, 27(1),
95-114.
Llorca‐Vivero, R. (2008). Terrorism and international tourism: New evidence. Defence and Peace Economics, 19(2), 169-188.ISO 690
Kollias, C., Kyrtsou, C., & Papadamou, S. (2013a). The effects of terrorism and war on the oil price–stock index relationship. Energy Economics, 40, 743-
752.
Kollias, C., Papadamou, S., & Siriopoulos, C. (2013b). European markets’ reactions to exogenous shocks: A high frequency data analysis of the 2005
London bombings. International Journal of Financial Studies, 1(4), 154-167.
Nikkinen, J., & Vähämaa, S. (2010). Terrorism and stock market sentiment. Financial Review, 45(2), 263-275.
Nitsch, V. and Schumacher, D. (2004) Terrorism and international trade: an empirical investigation. European Journal of Political Economy 20: 423–433
•
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