Role of Terrorist Events

International Journal of Disaster Recovery and Business Continuity Vol. 12, No. 1, (2021), pp. 1063-1075 Examination of Stock Markets Performance in Emerging Economies during Difficult Times: Role of Terrorist Events Dr. Ashfaq Ahmad Aamir Sohail Adil Riaz Farhad Hussain Iqra Ihsan Associate Professor, Hailey College of Commerce, University of the Punjab, Lahore. Email:[email protected] Lecturer Commerce, University of Sargodha (Sub Campus Bhakkar) [email protected] Lecturer Commerce, Government College University Faisalabad (Sub- Campus Hafiz Abad), Pakistan. , Ph.D. Scholar, Hubei University, China M.Com Scholar, Hailey College of Commerce, University of the Punjab, Lahore Abstract This study examines the effect of selected local and global terrorist events on Pakistan Stock Exchange by assessing KMI-30 and KSE-30 during the last decade. Data was collected for the daily closing stock prices of KMI-30 and KSE-30 for a period of 10 years (2010 to 2019). Twelve major terrorist events were selected from the South Asian Terrorism Portal (SATP) creating negative outcomes (deaths, injuries and other damages). Event study method was applied through estimation windows for Pre-Event, Event and Post-Event. Results indicate that the majority of the events have a significant impact on KSE-30 and KMI-30. More specifically the findings suggested that, Suicide attack on political offices, Attack on the Jamia masjid Madina, Twin suicide assaults at Parachinar, Assault on Army Public School, Paris, France bombing at bar, restaurant, theater and stadium, Self- destruction bombarding in Belgium, Suicide bombarding at Quetta’s Civil Hospital, Attack on Shrine of Lal Shahbaz and Attack on the political rally of the Balochistan Awami Party has significant effect on both markets. Further, results indicate that Attack on Shias at Alamdar road in Quetta, Bomb blast at Karbala Maula Imambargah and Attack on the New Sariab Police Training College has insignificant impact on both markets. According to the results of the study it is clear that KMI-30 and KSE-30 are unsystematic and does not suck up noisy information immediately. Efficient Market Hypotheses proves here wrong. Study has also shown that local events have severe effect on both indexes as compare to global events. This study could enhance understanding of different stakeholders regarding influence of terrorism on KMI-30 Index, Islamic stock market and KSE-30 Index, conventional index. Key words: KMI-30, KSE-30, Terrorist Events, Pakistan Stock Exchange, Event Study 1. INTRODUCTION Terrorism activities are uncertain events that cause shock, fear, and bad mood among investors. Due to these events stock market sharply decline because of panic-selling response from investors [1]. Mostly, prices of stock incorporate expectations of investors, but due to uncertain events like terrorism its react sudden unpredicted shocks. There is a growing trend from researchers to investigate the effect of terrorism on stock market indices. Literature support the notion that such types of activities adversely effect on stock market which lead to 1063 ISSN: 2005-4289 IJDRBC Copyright ⓒ2021 SERSC International Journal of Disaster Recovery and Business Continuity Vol. 12, No. 1, (2021), pp. 1063-1075 significant downfall of the market after accruing such event [2]. The role of stock markets for emerging economies is pivotal. Survival of emerging economies is impossible without stock markets. Stock markets of emerging or developing economies have greater risk than developed economies. It is difficult to predict the movement of stock markets but still it is measured as an important part for any country economy. Stock markets effect directly or indirectly with the event happening inside the country or outside the county. Financial markets are interconnected due to technology and News of any event (positive or negative) could spread quickly. Abnormality in one market could create impact on worldwide markets. Terrorist incidents can create uncertainty in the stock market with lower returns and higher volatility. Negative association is reported between terrorist activities and KSE 100 index based upon EGARCH model [3] Terrorist activities created serious damages and losses to the residents and market that is evident report of SATP as 1,803 causalities in 2016, 1,260 in 2017 and at least 71 fatalities in 2019. Pakistan is seriously affected by terrorism due to front line ally on war against terror. It created turbulent environment, high volatility, decline in foreign investment, increase in defense budget etc. This study examined the influence of terrorist event on two main indices of Pakistan stock exchange (PSX) i.e. KSE-30 index and KMI-30 index. It is observed that contagion effect of single event like 9/11 affecting almost every country [4] or the impact of different events on a limited number of countries [5]. There is an evident negative association between events and stock market performance. Similarly, There is a very scarce work available relevant to reaction of Islamic stock market i.e. KMI-30 Index during uncertain events and difficult times. Existence of KSE-30 Index and KMI-30 Index for Shariah compliant entities necessitates an empirical investigation. This study examines the change in sentiments of investors after the terrorist attacks on both indices to understand how investors assess terrorist news or how their behavior is affected after the attacks. It is found that investor’s sentiments are negatively affected due to information dissemination about the terrorist attack through different channels [6]; it may create fear and panic condition which adversely affect stock markets as investors lose their confidence [7] due to increased level of anxiety among investors who prefer to play with safer hands by taking off their investment in panic situation. Therefore, the study investigates the effect of local and global terrorist events on KSE-30 index and KMI-30 index by comparing the both indices. It could help to anticipate the stock market in the future on happening of any terrorist event as investors can predict the both markets (KSE- 30&KMI-30) returns and volatility in returns for better decisions in emerging economies like Pakistan. Comparison of both markets (KMI-30&KSE-30) enables to take prompt decisions regarding investment or otherwise as a reaction of the markets to different terrorist activities. The performance of these markets affected by many factors i.e. political uncertainty, terrorism and natural disasters e.g. flood, earth quake and tsunami etc. It is reported that natural disasters have no significant impact on the returns of Stock markets during a period of 2013 to 2017 [8]. 2.0 LITERATURE REVIEW 2.1 Efficient Market Hypotheses Efficient market hypotheses (EMH) states that, trading of stock in market is always fair weather, it is about to buy the undervalue stock or sale overvalued stock. It is assumed that market behave normally e.g. if the happening event is good market will react positively and vice versa. Reaction of the market could depend on the nature of the happening/event. “In an efficient market, competition among the many intelligent participants leads to a situation where, at any point in time, actual prices of individual securities already reflect the effects of information based both on events that have already occurred and on events which, as of now, the market expects 1064 ISSN: 2005-4289 IJDRBC Copyright ⓒ2021 SERSC International Journal of Disaster Recovery and Business Continuity Vol. 12, No. 1, (2021), pp. 1063-1075 to take place in the future. In other words, in an efficient market at any point in time the actual price of a security will be a good estimate of its intrinsic value” [9] 2.2 Empirical Studies and Hypotheses Devolvement Catastrophic events create fears among investors, therefore, its influence the investment behavior of investors. Investor’s sentiments like risk preference, asset prices etc. affected through these events. It is hard for market to return back in previous position quickly after an uncertain event [10], however, some investors state that market will recover within a month after such events [11]. In addition, some researchers also believed that after uncertain events the market recover quickly and it may not take more than one week to bring back to its index position [12]. After 9/11 the airline industry suffered a lot and it is found by different researchers that airline sector face greater decline in such types of events. Some researchers also point out that after Madrid attacks the stock index of MSCI fell by more than 4.5% in the first days after that event, while it dropped by 1.72% after the event [13]. Researchers reported negative association between global terrorist attacks and stock market index. [14] Evaluated the risk and return of Dow Jones Islamic Market Index (DJIMI) and Dow Jones World (DJW) index by conducting co-integration time series analysis and reported no detectable correlation between these two indexes. Islamic markets in Asia are more exposed to shocks that are persistent. A correlation study was undertaken for transference on information between the Kuala Lumpur Syariah (KLSY) and Jakarta Islamic Indices (JKSY) and reported unsymmetrical effect of volatility transference [15]. The impact of psychological factors effecting investors behavior during panic situation and he concluded that such type of events negatively effect on investors investment behavior. After 9/11 the Dow Jones index suffered losses of more than 7% six days after the reopening of the American stock markets. Terrorist activities do not affect the stock market development in the short run. Anyhow, these terrorist episodes affect the performance of the stock market in the long run [16]. [17] Concluded that there is a cause and effect association between the Islamic stock market and traditional stock markets i.e. Asia, European stock markets and Brent oil markets with the exception of United States market.

Load more