Terrorism and international stock returns

We develop a terrorism risk factor and show its statistical and economic relevance to stock returns. Using time-series data from 40 stock markets around the world, we show that our terrorism factor has a statistically strong contemporaneous effect on countries' stock returns and is able to predict returns for approximately 53% of the countries in our sample. Our findings suggest that the source of this predictability is via both the discount rate and cash flow channels. Our results survive a battery of robustness tests, including tests based on multiple proxies for the terrorism factor.

Automated summary

We developed a terrorism risk factor and demonstrated its statistical and economic relevance to stock returns. Through analysis of time-series data from 40 stock markets worldwide, we found strong contemporaneous effects of our terrorism factor on stock returns in various countries, and it was able to predict returns for approximately 53% of the countries in our sample. The predictability appears to be influenced by both the discount rate and cash flow channels, as revealed by our study. Our findings were robust across multiple tests, including those using different proxies for the terrorism factor.