Stock Market Volatility and Terrorism: New Evidence from the Markov Switching Model

Aslam Faheem (), Kang Hyoung-Goo, Mughal Khurrum Shahzad, Awan Tahir Mumtaz and Mohmand Yasir Tariq
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Aslam Faheem: COMSATS University, 45550, Islamabad, Pakistan
Kang Hyoung-Goo: Hanyang University Business School, Seoul, South Korea
Mughal Khurrum Shahzad: State Bank of Pakistan, Karachi, Pakistan
Awan Tahir Mumtaz: COMSATS University, 45550, Islamabad, Pakistan
Mohmand Yasir Tariq: COMSATS University, 45550, Islamabad, Pakistan

Peace Economics, Peace Science, and Public Policy, 2021, vol. 27, issue 2, 263-284

Abstract: Terrorism in Pakistan poses a significant risk towards the lives of people by violent destruction and physical damage. In addition to human loss, such catastrophic activities also affect the financial markets. The purpose of this study is to examine the impact of terrorism on the volatility of the Pakistan stock market. The financial impact of 339 terrorist attacks for a period of 18 years (2000–2018) is estimated w.r.t. target type, days of the week, and surprise factor. Three important macroeconomic variables namely exchange rate, gold, and oil were also considered. The findings of the EGARCH (1, 1) model revealed that the terrorist attacks targeting the security forces and commercial facilities significantly increased the stock market volatility. The significant impact of terrorist attacks on Monday, Tuesday, and Thursday confirms the overreaction of investors to terrorist news. Furthermore, the results confirmed the negative linkage between the surprise factor and stock market returns. The findings of this study have significant implications for investors and policymakers.

Keywords: days of the week effect; Pakistan stock exchange; terrorist events (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1515/peps-2020-0005

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