A Comparative Analysis of Effects of Terrorism on World Equity Markets

The purpose of current study is to review the key empirical and theoretical papers regarding the impact of terrorism event on the equity returns of developed and developing countries. Furthermore, the current study aimed at comparing the differential effects of terrorism events on developed and developing equity markets and the possible causes of these differential effects. Regarding the methodology, the current study has reviewed the previous conceptual and empirical studies. The review of literature highlights that the impact of terrorism events varies in the developing/emerging markets and developed markets. Furthermore, the possible causes of differential effect are discussed. Also, the relationship between the level of development and the frequency of terrorism events is elaborated. These findings imply that more attention has been paid to the effects of terrorism on equity markets instead of the ways through which terrorism travels to the equity market. The future research may focus on this issue by examining the linkages between terrorism, poverty, government spending, and allocation of budget to health, education, and other necessities that may increase the opportunity cost for the individuals to engage with terrorist groups. Likewise, the corporations need to spend more towards the society in terms of their Corporate Social Responsibility (CSR) as well as a tool to reduce the frequency of terrorism events as a risk management strategy. Future studies may also study the country-wise CSR spending and the frequency of terrorism events because terrorism requires the pre-event risk mitigation strategies. Therefore, the post-event risk evaluation should be given less importance in comparison to pre-event strategies