The impacts of terror attacks on the financial markets

Abstract

We are unfortunately living in an era where terrorism threatens global peace and international security, democratic systems where the State is supposed to fight violence, struggle to assure the freedom and security of the population. This paper has aimed at analysing the impact of terror attacks on financial markets in Europe on different indexes compared to the MSCI World Index. This work uses a statistical approach, the market model method. Within this framework, the event study has examined the reactions of the different indexes in Europe namely in the United Kingdom, Belgium, France, Germany, the Netherlands, Italy, Spain, Norway, Sweden and Finland by sorting out the abnormal returns and cumulative abnormal returns.

Firstly, the impact of events that created significant reactions in their country have also been tested on the other countries in Europe that faced attacks. Indexes have been chosen regarding to its importance in each country.

Secondly, some research will be made about the impact of the attacks on the economy of the countries studied above. This point is interesting in order to discover indirect impacts of terror attacks. The case of Egypt and Turkey has also been taken into account in this paper. And thirdly the different authorities responses in Europe have been explained as well as the systems put in place to counter terrorism. The results of those analyses show that the impacts on the financial markets are limited, only few events experienced negative abnormal returns. Moreover the impact of significant attacks on other countries is also limited and controlled. Indeed, the financial markets tend to be used and to absorb the shocks. This is the same case for the consumption sphere, businesses rebound faster. However the repetitive occurrence of attacks at the same place create more reaction, like in France and Egypt. It is fair to say that terror attacks are nowadays absorbed by the markets rapidly if the event is isolated.