Big Questions, Little Answers: Terrorism Activity, Investor Sentiment and Stock Returns

Motivated by the investor sentiment literature and assuming that terrorist activity influences investor mood the paper explores whether terrorism exerts a significant negative impact on daily stock market returns for a sample of 22 countries. The employed empirical specifications are based on flexible versions of the World CAPM allowing for autoregressive conditional heteroscedasticity. The results suggest that terrorist activity leads to significantly lower returns on the day of terrorist attack occurrence. In addition, the negative effect of terrorist activity is substantially amplified as the level of psychosocial effects increases. On the one hand this evidence sheds light to the underlying mechanism via which terrorism affects stock markets while on the other hand provides further empirical support for the sentiment effect.Sentiment, Terrorism, Stock Market, Panel, Pooled Panel ARCH

Security Economics: A Guide for Data Availability and Needs

The rapid and accelerating development of security economics has generated great demand for more and better data to accommodate the empirical research agenda. The present paper serves as a guide to policy makers and researchers for security-related databases. The paper focuses on two main issues. Firstly, it takes stock of the existing databases, highlighting their main components and also performs a brief statistical comparison. Secondly, it discusses data shortages and needs that are considered essential for enhancing our understanding of the complex phenomenon of terrorism as well as designing and evaluating policy.

Investment decisions in manufacturing: Assessing the effects of real oil prices and their uncertainty

We investigate the effects of real oil prices and their uncertainty on the investment decision. Making use of plant-level data, we estimate dynamic, discrete choice models that allow modeling investment inaction, under different assumptions related to initial conditions and unobserved heterogeneity. We find that increases in real oil price changes and in real oil price uncertainty significantly reduce the likelihood of investment action – in line with the predictions of irreversible investment theory. We also document that the investment decisions exhibit strong pure state dependence and are also significantly affected by initial conditions

Testing the Ricardian Equivalence Theorem: Time Series Evidence from Greece

The paper explores the long-run relationship between government domestic borrowing and private savings for a small EU country. It represents an attempt to assess the relevance of Ricardian Equivalence in Greece. The empirical findings are that in accordance to the Ricardian Equivalence theorem prediction, government borrowing in Greece leads to an increase in household savings. However, the increased private savings do not completely offset increased government debt. In other words, contrary to the Ricardian Equivalence theorem, households to some extent perceive government bonds as net wealth and consequently increased their consumption. This behaviour can be thought as being the result of liquidity constraints faced by households and also myopic behaviour due to uncertainty regarding the future path of taxes.

Cross-Country Stock Market Reactions to Major Terror Events: The Role of Risk Perception

The extant literature has established that the occurrence of major terrorist events leads to negative abnormal returns not only to the location of the event, but also to third countries. However, the literature has neither investigated which are the diffusion mechanisms of terrorist shocks, nor whether the diffusion pattern is uniform. Given terrorism's idiosyncrasies and motivated by memory-based utility and the Availability heuristic, we conjecture that the stock market reaction depends on the country's perceived terrorism risk. We document that terrorism risk perception is able to explain a statistically significant portion of cross-country abnormal returns' variation. Moreover, risk perception's predictive power over abnormal returns is robust, even when we take into account countries' terrorism record or when we control for economic linkages.Behavioral Economics, Risk Perception, Stock Market Return, Terrorism

Competition and Contestability in Transition Banking: An Empirical Analysis

In this paper we focus on the market structure of the banking system in a set of Transition countries. In particular, by employing reduced-form revenue equations in a panel framework we are able to estimate the Panzar-Rosse h-statistic. We mainly control for heterogeneity by conditioning our estimation on bank-specific characteristics so as to account for differences in financial risk, size and finance mix. Our empirical results indicate that for the vast majority of cases banking systems operate under Monopolistic Competition

Terrorism Risk Concern in Europe

We explore whether differences of terrorism risk perception across all European countries reflect their underlying differences in terrorism risk, which we decompose into a long term and innovation component. We employ longitudinal country-level data on terrorism risk concern and our modeling approach is motivated by the Bayesian framework. We conclude that the observed risk perception variation is significantly explained by the long term terrorism countries face, while the cyclical part of terrorism activity does not affect risk perception.

On the Determinants of Terrorism Risk Concern in Europe

We investigate whether differences in terrorism risk are mirrored on terrorism risk concern across European countries for the period 2003-2007. We find that the average propensity for terrorism risk concern is indeed affected by actual risk levels. Furthermore, country and individual heterogeneity contribute substantially to the variation of observed risk concern. According to our findings, males, singles and individuals with white collar jobs are less likely to mention terrorism as one of the most pressing issues their country faces. In contrast, political positioning towards the right end of the spectrum and living in rural areas make it more likely to be concerned about terrorism. As far as competing risks are concerned, we find that the likelihood terrorism is mentioned increases when competing risks' drivers also increase such as taxation, inflation, unemployment and poverty risk at work. In contrast, terrorism is less likely to be mentioned when the determinants of crime, immigration rates, housing costs and pensions are higher. Finally, based on the Bayesian framework we also examine the formation of terrorism risk perceptions, and decompose the observed country level time series of terrorism activity into a long and a short run component. We conclude that the observed risk concern variation is mostly explained by the trend part of terrorism activity countries face, although cyclical variations are also important.probit, survey data, terrorism risk concern, time series decomposition

Terrorism Shocks and Public Spending: Panel VAR Evidence from Europe

Based on a trivariate panel VAR and utilizing Generalized Impulse Responses, we explored the dynamic impacts of terrorism and crime risks on public order and safety spending across European countries during the period 1994-2006. Our findings suggest that both a shock in terrorism risk or in crime, significantly increase the subsequent trajectory of public order and safety spending. As a by-product we find that public spending is ineffective in reducing observed crime or terrorism risks.Panel VAR, Public Order and Safety Spending, Terrorism Activity

Opposites attract: The case of Greek and Turkish financial markets

We investigate the presence of financial linkages between Turkey and Greece. In particular, we estimate bivariate vector error correction systems between the Greek and Turkish stock markets and then between the Greek Drachma and the Turkish Lira to test for long and short run causality and interdependence. The findings indicate that interdependence and a long-run causal relationship are indeed present. Given the apparent evidence for nominal linkages, we test a number of possible propagation mechanisms that could produce these linkages, such as real linkages, trade linkages, common balance of payments shocks, and contagion. Our findings suggest that the observed comovement of the two markets can be primarily attributed to the increased real integration of both countries, as well as the fact that they share a common set of trade and FDI partners. We also find evidence of contagion effects between the Drachma and Lira markets, but not between the stock markets. Finally, we conclude with a discussion of the implications of our findings. --Cointegration,Contagion,Interdependence,Market Linkages