THE IMPACT OF TERRORISM ON TURKISH FINANCIAL MARKETS: THE SECTORAL APPROACH

Abstract

Purpose- This study investigated the financial effects of the environment of uncertainty and fear resulting from terrorist attacks on subsectors such as industry, tourism, and service. Methodology- In order to examine the interaction between the variables, EGARCH models, which are frequently used in the econometric literature and take into account the asymmetric effect of shocks, were used. Unlike studies in the literature, terrorist attacks not only within the country but also outside the country were taken into consideration in this study. Findings- According to the findings obtained, the terrorist attacks and uncertainty environment in both Turkey in the developing country status and the US in the developed country status have an adverse affect the sub-sectors in financial markets at different levels. This adverse impact has been found that is not equal for each sub-sectors, and the tourism sector is more affected by terrorist attacks compared to the industrial and service sectors. Also, it has been found that news about terrorist attacks affected volatility more than good news in the same period. Conclusion- Considering the borderless structure and the size of the trade volume of financial markets in the globalizing world, it cannot be thought that terrorist attacks will not affect another country while they occur in one country. In view of the share of the tourism sector in the GDP of Turkey and the rational behavior of human factors in an environment of uncertainty and fear, the fact that the environment of uncertainty most affects this sector gives a result that is in line with expectations. In addition, it has been determined that financial market shocks resulting from the activities classified as terrorism experienced by countries with a large economic volume and market share in the world, especially the USA, have a short-term spill over effect on the global market. In this context, although ensuring goverment security creates an environment of trust, measures to be taken with the joint work of global security organizations to minimize these effects will help to protect the stable structure of the markets more effectively.

Keywords

• Financial markets
• terrorism
• exponential GARCH
• sectoral analysis
• volatility

References

1. Aslam, F., and Kang, H.-G. (2015). How Different Terrorist Attacks Affect Stock Markets. Defence and Peace Economics, 26(6), 634-648.
2. Bandyopadhyay, S., Sandler, T., and Younas, J. (2014). Foreign direct investment, aid, and terrorism. Oxford Economic Papers, 66(1), 25-50.
3. Barrett, W., Heuson, A., Kolb, R., and Schropp, G. (1987). The adjustment of stock prices to completely unanticipated events. Financial Review, 22(4), 345-354.
4. Beine, M., Cosma, A., and Vermeulen, R. (2010). The dark side of global integration: Increasing tail dependence. Journal of Banking and Finance, 34(1), 184-192.
5. Bhuiyan, E., and Chowdhury, M. (2020). Macroeconomic variables and stock market indices: Asymmetric dynamics in the US and Canada. The Quarterly Review of Economics and Finance, 77, 62-74.
6. Bilson, C., Brailsford, T., Hallett, A., and Shi, J. (2012). The impact of terrorism on global equity market integration. Australian Journal of Management, 37(1), 47-60.
7. Bollerslev, T. (1986). Generalized autoregressive conditional heteroskedasticity. Journal of Econometrics, 31(3), 307-327.
8. Brooks, C. (2008). Introductory Econometrics for Finance. New York: Cambridge University Press.

9. Camilleri, S., Scicluna, N., and Bai, Y. (2019). Do stock markets lead or lag macroeconomic variables? Evidence from select European countries. The North American Journal of Economics and Finance, 48, 170-186.
10. Charles, A., and Darné, O. (2006). Large shocks and the September 11th terrorist attacks on international stock markets. Economic Modelling, 23(4), 683-698.
11. Chau, F., Deesomsak, R., and Wang, J. (2014). Political uncertainty and stock market volatility in the Middle East and North African (MENA) countries. Journal of International Financial Markets, Institutions and Money, 28, 1-19.
12. Chaudhry, N., Roubaud, D., Akhter, W., and Shahbaz, M. (2018). Impact of terrorism on stock markets: Empirical evidence from the SAARC region. Finance Research Letters, 26, 230-234.
13. Christiansen, C., and Ranaldo, A. (2009). Extreme coexceedances in new EU member states’ stock markets. Journal of Banking and Finance, 33(6), 1048-1057.
14. Czudaj, R. (2018). Is equity market volatility driven by migration fear? Finance Research Letters, 27, 34-37.
15. Döpke, J., and Pierdzioch, C. (2006). Politics and the stock market: Evidence from Germany. European Journal of Political Economy, 22(4), 925-943.
16. Dumitriu, E. (2019). The E.U.'s Definition of Terrorism: The Council Framework Decision on Combating Terrorism. German Law Journal, 5(5), 585-602.
17. Enders, W., Sachsida, A., and Sandler, T. (2006). The Impact of Transnational Terrorism on U.S. Foreign Direct Investment. Political Research Quarterly, 59(4), 517-531.
18. Engle, R. (1982). Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation. Econometrica, 50(4), 987-1007.
19. Füss, R., and Bechtel, M. (2008). Partisan politics and stock market performance: The effect of expected government partisanship on stock returns in the 2002 German federal election. Public Choice, 135, 131–150.
20. Gunasekarage, A., Pisedtasalasai, A., and Power, D. (2004). Macroeconomic Influence on the Stock Market: Evidence from an Emerging Market in South Asia. Journal of Emerging Market Finance, 3(3), 285-304.
21. Karolyi, G., and Martell, R. (2010). Terrorism and the Stock Market. International Review of Applied Financial Issues and Economics, 2(2), 285-314.
22. Khan, D., Ullah, A., Alim, W., and Haq, I. (2020). Does terrorism affect the stock market returns and volatility? Evidence from Pakistan's stock exchange. Journal of Public Affairs, e2304, 1-10.
23. Lee, C.-y. (2017). Terrorism, Counterterrorism Aid, and Foreign Direct Investment. Foreign Policy Analysis, 13(1), 168–187.
24. Lehkonen, H., and Heimonen, K. (2015). Democracy, political risks and stock market performance. Journal of International Money and Finance, 59, 77-99.
25. Markoulis, S., and Katsikides, S. (2020). The Effect of Terrorism on Stock Markets: Evidence from the 21st Century. Terrorism and Political Violence, 32(5), 988-1010.
26. Memdani, L., and Shenoy, G. (2019). Impact of terrorism on stock markets across the world and stock returns: An event study of Taj attack in India. Journal of Financial Crime, 26(3), 793-807.
27. Mun, K.-C. (2005). Contagion and impulse response of international stock markets around the 9–11 terrorist attacks. Global Finance Journal, 16(1), 48-68.
28. Nelson, D. (1991). Conditional Heteroskedasticity in Asset Returns: A New Approach. Econometrica, 59(2), 347-370.
29. Niederhoffer, V. (1971). The Analysis of World Events and Stock Prices. The Journal of Business, 44(2), 193-219.
30. Palkar, D., Larson, S., and Larson, R. (2012). The valuation effects of military contract awards surrounding 11th September. Applied Financial Economics, 22(2), 147-164.
31. Piñeiro-Chousa, J., Vizcaíno-González, M., and Pérez-Pico, A. M. (2017). Influence of Social Media over the Stock Market. Psychology and Marketing, 34(1), 101-108.
32. Powers, M., and Choi, S.-W. (2012). Does transnational terrorism reduce foreign direct investment? Business-related versus non-businessrelated terrorism. Journal of Peace Research, 49(3), 407-422.
33. Reilly, F., and Drzycimski, E. (1975). The Stock Exchange Specialist and the Market Impact of Major World Events. Financial Analysts Journal, 31(4), 27-32.
34. Richman, V., Santos, M. R., and Barkoulas, J. T. (2005). Short-and long-term effects of the 9/11 event: the international evidence. International Journal of Theoretical and Applied Finance, 8(7), 947-958.
35. Rider, B. (2003). Financial regulation and supervision after 11th September, 2001. Journal of Financial Crime, 10(4), 336-369.
36. Shannon, M. (2012). Did the September 11th attacks affect the Canadian labour market? Economics Letters, 115(1), 91-93.
37. University of Maryland. (2021). National Consortium for the Study of Terrorism and Responses to Terrorism An Emeritus Center of Excellence of the U.S. Department of Homeland Security. Retrieved from https://www.start.umd.edu/gtd/
38. Wasserfallen, W. (1989). Macroeconomics news and the stock market: Evidence from Europe. Journal of Banking and Finance, 13(4-5), 613- 626.