Stock markets and terrorist attacks: Comparative evidence from a large and a small capitalization market

An expanding body of literature has investigated the economic impact of terrorist attacks. A part of this literature has focused on financial markets. We examine three research questions: whether markets' reactions to terrorism have changed through time; whether market size and maturity determine reactions, and whether reactions depends upon either the type of targets or the perpetrators of the attack. To this effect, a large - the London stock exchange - and a small - the Athens stock exchange - capitalization markets are used as the vehicles for the empirical investigation. Results from an event study methodology as well as from conditional volatility models suggest that size and maturity as well as specific attributes of terrorist incidents are possible determinants of markets' reactions.

Research highlights► Markets react to exogenous shocks such as terrorist attacks. ► Thirty-six terrorist events examined for a large and a small capitalization market. ► Event study analysis and conditional volatility models used. ► Markets react to attacks depending on the attributes of the incident. ► Differences between large and small capitalization market.