Small-Scale Crisis Events Impact on Price Discovery and Volatiliy Transmission Across Financial Markets : Evidence from Terror Attacks, Assassinations, North-Korean Saber-Rattling, and Natural Disasters

We examine the impact of 51 terrorist attacks, three wars, an assassination, and other national security-related shocks on stock markets located in nations proximate to the crises and on American Depository Receipts (ADRs) of firms headquartered in those same nations. ADRs are securities that trade on American markets that entitle investors to the cash flows (denominated in dollars) of foreign firms. We find that small-scale terrorist attacks that receive little media attention do not affect ADR returns. Large scale terrorist attacks, the assassination of Benazir Bhutto, highly provocative actions by North Korea, and small-scale wars affect ADR returns while natural disasters do not. The negative effect on ADRs is short lived. We also examine the volatility structures of two ADR indexes (Korea and India) and their underlying home market indexes. We find that there is bi-directional information flow between the ADR markets and the home market indexes. We find evidence that various shocks affect the volatility structures of these indexes, both ADR and home market indexes