UNIVERSITE CATHOLIQUE DE LOUVAIN LOUVAIN SCHOOL OF MANAGEMENT From Madrid to Brussels: The impact of four terror attacks on European stock markets Supervisor : Philippe GRÉGOIRE Research Master Thesis submitted by Nicolas SPILIERS With a view of getting the degree of Master in Management ACADEMIC YEAR 2015-2016 ii. Acknowledgements I would like to thank my supervisor Prof. Dr. Philippe Grégoire as well as Mr. Arnaud Monseur for their help in the realisation of this thesis. iii. Contents Acknowledgements ........................................................................................................................................................... ii Contents ............................................................................................................................................................................... iii List of tables ......................................................................................................................................................................... v List of figures ....................................................................................................................................................................... v 1 Introduction ................................................................................................................................................................... 1 2 Literature review ......................................................................................................................................................... 4 2.1 Terrorism and its impact on the economy ........................................................................................... 4 2.1.1 Macroeconomic consequences ........................................................................................................ 4 2.1.2 Effects on industries ............................................................................................................................ 6 2.1.3 Other research ........................................................................................................................................ 8 2.2 Terrorism and its impact on the stock market ................................................................................... 9 2.2.1 Effects on general and international stock markets ............................................................ 10 2.2.2 Effects on general country stock indices .................................................................................. 12 2.2.3 Effects on industry stocks ............................................................................................................... 14 2.2.4 Effects on stocks of firms targeted .............................................................................................. 15 2.2.5 Effects on bond, currency, and other markets ....................................................................... 16 3 Operational definitions ........................................................................................................................................... 17 3.1 Terrorism ........................................................................................................................................................ 17 3.2 Europe .............................................................................................................................................................. 18 3.3 Terrorism in Europe ................................................................................................................................... 18 3.4 Stock prices .................................................................................................................................................... 20 4 Research questions ................................................................................................................................................... 23 5 Methodology................................................................................................................................................................ 25 5.1 The event study ............................................................................................................................................ 25 5.1.1 Theoretical foundations .................................................................................................................. 25 5.1.2 History and background .................................................................................................................. 27 5.1.3 Different ways of conducting event studies ............................................................................ 28 5.1.4 Mean model methodology .............................................................................................................. 29 5.1.5 Market model methodology ........................................................................................................... 33 5.1.6 Remarks ................................................................................................................................................. 34 5.2 Critical views ................................................................................................................................................. 36 5.3 Industry identification and index selection ...................................................................................... 37 5.3.1 Industries in general ......................................................................................................................... 38 iv. 5.3.2 Specific industries .............................................................................................................................. 38 6 Empirical findings ..................................................................................................................................................... 45 6.1 Impact on the European stock market ................................................................................................ 45 6.1.1 Impact compared to previous returns ...................................................................................... 45 6.1.2 Impact compared to the global stocks ....................................................................................... 47 6.2 Impact on the country that suffered the attack ............................................................................... 49 6.2.1 Impact compared to previous returns ...................................................................................... 49 6.2.2 Impact compared to the European stocks ............................................................................... 50 6.3 Impact on industries ................................................................................................................................... 52 6.3.1 Impact compared to previous returns ...................................................................................... 53 6.3.2 Impact compared to the total market ........................................................................................ 55 6.4 Impact on specific industries related to terrorism ........................................................................ 57 6.4.1 Impact compared to previous returns ...................................................................................... 58 6.4.2 Impact compared to the total market ........................................................................................ 59 6.5 Overall view of the findings ..................................................................................................................... 61 7 Discussion and tentative explanation of the findings ................................................................................ 64 7.1 Muted reactions after Paris and Brussels attacks .......................................................................... 64 7.2 Lesser reaction after London than after Madrid ............................................................................. 67 7.3 Differences in impact between geographical levels ...................................................................... 68 7.4 General industry impacts ......................................................................................................................... 69 7.5 Specific industry impacts ......................................................................................................................... 69 7.6 Final remarks ................................................................................................................................................ 71 7.6.1 The literature ....................................................................................................................................... 71 7.6.2 Terrorism in Europe in perspective ........................................................................................... 72 7.6.3 Horizon ................................................................................................................................................... 74 7.6.4 Theory ..................................................................................................................................................... 74 7.6.5 Implications for investors............................................................................................................... 76 8 Conclusion ...................................................................................................................................................................