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Our world today is plagued by terrorism. It affects not only peace but also has serious damage to the economy. Much has been written about the macroeconomic short-term impact of terrorist attacks in risk aversion, the equity market valuations, bond yields, oil prices, aggregate consumption and investment activity and even medium-term effects on the regulation of trade and fiscal policy responses of governments and the private sector, but it is known much less about how this potentially lasting threat of terrorism affects the population in the prices of individual firms.
Some studies have argued that can be manifested in the psychological fear of terrorism that can affect economic behavior. Remember the 9 / 11 bombing. After that terrorist attack, insurers reduced or even no supply made terrorism insurance throughout the economy, delay or prevent many projects for the future – mostly construction in big cities due to creditors or investors' concerns. The unprecedented terrorist attacks in the terrible September 11, 2001 caused massive casualties and damage and ushered in an era of great uncertainty. That shocking display of brute force also changed the way we think about terrorism and moved the topic to the first recorder academic and public attention. One important way in which we changed our perspective on terrorism is a geopolitical risk that affects global economy and financial markets.
G. Andrew Karolyi and Rodolfo Martell, examined the impact on stock prices of the terrorist attacks. Using an official list of terrorism-related incidents compiled by the Office for Combating Terrorism of the U.S. State Department, 75 attacks were identified between 1995 and 2002 in which traded firms are targets. As for the case study analysis around the day of the attacks uncovers evidence of a statistically significant decrease negative reaction of stock prices of -0.83%, which corresponds to an average loss per company and the attack of $ 401 million in market capitalization of the company. A cross-sectional analysis of abnormal returns suggests that the impact of terrorist attacks varies by country of origin of the target company and the country in which the incident occurred. The terrorist attacks in countries that are richer and more democratic are associated with more negative price reactions shares. Most intriguingly, we see that human capital losses, such as the kidnapping of company executives, are associated with higher negative reactions prices of securities that physical losses, such as bombings of facilities or buildings.
The passage of the USA Terrorism Risk Insurance Act (TRIA) in 2002, with his willingness to support 100 billion U.S. dollars at no cost to the reinsurance of terrorism, was in fact a U.S. event important legislative. But unfortunately, not foresee any long-term scheme for insurance against terrorism and, even today, is not clear what course of action from industry and government is further once TRIA expires in December 2005. Some argue that "America can not risk a sure bet on terror" and that "the renewal of TRIA is critical as a private insurance market never developed. Some experts still say that the risk of catastrophic terrorism is uninsurable by the private market, because its true dimensions are incalculable, if you live in London, Madrid or New York.
With these achievements sweeping views of the insurance market terrorism, we argue that it is even more important now to develop new measures of the economic consequences of terrorist acts to guide policy. In this article, the reaction of stock prices of publicly traded companies that have been affected or targeted by a terrorist attack is providing average estimates losses caused by these events has been used. Karolyi and Martells further analysis "of the cross-section variation in price reactions actions suggests that the losses caused by terrorist attacks are bigger when they take the form of kidnapping. They also showed that these losses are greater when the company is in a richer country or a country with a more democratic regime. It is important, however, remember that their results were obtained using only a subset of the universe of terrorist incidents classified as such by the State Department, as only are studying the reaction associated with business publicly traded. Moreover, in their study, we chose a simplified approach and only studied the short-term responses of firms to these attacks and ignoring the effects potential long-term cash flows or cost of capital (risk premium) effects. A resurgent market for terrorism risk insurance claims that insurers generate better models to assess the likelihood and potential losses resulting from terrorism. Their results suggest that the characteristics of attack (against kidnappings destruction of property) and country characteristics of target companies provide assistance in assessing the losses. They expect results presented in their study may at least serve as a useful starting point in the current debate around terrorism insurance, TRIA renewal and features legislation replacing it.
In conclusion, to put it in a nutshell, understanding the nature of terrorism and the magnitude of their effects is a prerequisite for designing appropriate policies to prevent terrorism, to alleviate the costs of terrorism, or to reduce an economy's vulnerability to attack.
About the Author:
Bidz dela Cruz is a Web Manager of Track and Field
Article Source: ArticlesBase.com – The Ill Effects of Terrorism to the Stock Market
11/30/09 – ProducersWEB.com’s Daily Industry News Update
