The effects of terrorism on global capital markets Andrew H. Chen a , Thomas F. Siems b, * a Cox School of Business, Southern Methodist University, Dallas, TX 75275, USA b Federal Reserve Bank of Dallas, Dallas, TX 75201, USA Received 3 June 2002; received in revised form 21 July 2003; accepted 4 August 2003 Available online 8 March 2004 Abstract The event study methodology is used to assess the effects of terrorism on global capital markets. We examine the U.S. capital market’s response to 14 terrorist/military attacks dating back to 1915 and global capital markets’ response to two recent events—Iraq’s invasion of Kuwait in 1990 and the September 11, 2001 terrorist attacks. U.S. capital markets are more resilient than in the past and recover sooner from terrorist attacks than other global capital markets. Evidence suggests that this increased market resilience can be partially explained by a stable banking/financial sector that provides adequate liquidity to promote market stability and minimize panic. D 2004 Elsevier B.V. All rights reserved. JEL classification: G14; G15; G18 Keywords: Global capital markets; Terrorism; Event study methodology; Efficient markets hypothesis; Market resilience 1. Introduction Prices of individual stocks reflect investors’ hopes and fears about the future, and taken in aggregate, stock price movements can generate a tidal wave of activity. Because of their liquidity, terrorist attacks, military invasions and other unforeseen disastrous occurrences can have serious implications for stocks and bonds. Decisions to buy and sell can quickly, easily, and inexpensively, be reversed. When information becomes available about a cataclysmic event—like a terrorist or military attack—investors often flee the market in search of safer financial instruments and panic selling ensues. This initial panic has the potential to turn into chaos and a long-term bear market, or it can be reversed if investors’ hopes return. 0176-2680/$ - see front matter D 2004 Elsevier B.V. All rights reserved. doi:10.1016/j.ejpoleco.2003.12.005 * Corresponding author. Tel.: +1-214-922-5129. E-mail address: tom.siems@dal.frb.org (T.F. Siems). www.elsevier.com/locate/econbase European Journal of Political Economy Vol. 20 (2004) 349–366