The effects of terrorism and war on the oil price-stock index relationship

The effects war and terrorism have on the covariance between oil prices and the indices of four major stock markets - the American S&P500, the European DAX, CAC40 and FTSE100 - using non-linear BEKK-GARCH type models are investigated. The findings indicate that the covariance between stock and oil returns is affected by war. A tentative explanation is that the two wars examined here predispose investors and market agents for more profound and longer lasting effects on global markets. On the other hand, terrorist incidents that are one-off unanticipated security shocks, only the co-movement between CAC40, DAX and oil returns is affected and no significant impact is observed in the relationship between the S&P500, FTSE100 and oil returns. This difference in the reaction may tentatively be interpreted as indicating that the latter are more efficient in absorbing the impact of terrorist attacks. (C) 2013 Elsevier B.V. All rights reserved.