Terrorist attacks and investor risk preference: Evidence from mutual fund flows

Albert Y. Wang and Michael Young

Journal of Financial Economics, 2020, vol. 137, issue 2, 491-514

Abstract: Using a comprehensive list of terrorist attacks over three decades, we find that aggregate investor risk aversion inversely relates to terrorist activity in the United States. A one standard deviation increase in the number of attacks each month leads to a $75.09 million drop in aggregate flows to equity funds and a $56.81 million increase to government bond funds. Tests on alternative channels further suggest that the shift in aggregate risk aversion is driven mainly by an emotional shock rather than changes in wealth or the outside environment. We also investigate possible alternate explanations for reduced flows to risky assets. Our evidence is consistent with a fear-induced increase in aggregate risk aversion.

Keywords: Terrorism; Risk preference; Risk aversion; Visceral emotions; Mutual fund flows (search for similar items in EconPapers)
JEL-codes: D91 G11 G41 H56 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (60)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:137:y:2020:i:2:p:491-514

DOI: 10.1016/j.jfineco.2020.02.008

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