Effect of Terrorism on Stock Markets: Empirical Evidence from SAARC Countries

Abstract

Terrorist’s activities are biggest threat to the different regions of the world because these events increased dramatically in last 10 years. There were approximately 25000 terrorist attacks in SAARC countries since 2000 and causing major economic destructions. This study examines that the terrorism have significant negative impact on stock market returns of “highly effected” countries (Pakistan & India) and the “less effected” countries (Srilanka & Bangladesh) in SAARC region. These stock markets include Pakistan Stock Exchange (PSE), Colombo Stock Exchange (CSE), Chittagong Stock Exchange (CASPI) and Bombay Stock Exchange (BSESN). In highly effected countries, the negative impact lasts for one day, while in less effected countries this negative impact continues for second day as well. The stock markets of highly effected countries respond negatively only to the bombing type of attack. On the other hand, stocks markets of less effected countries are negatively effects by assassination and hostage-taking type of attack. Moreover, the stock markets of both kinds of countries do not respond negatively to the death toll because of terrorism. It is also found that the stock markets of these countries do not respond negatively to the natural disasters like earthquake