How terrorist attacks influence the stock markets in France — an event study from different industrial perspectives Author: Said Khaled Schakib Student Number: 10841288 Supervisor: Jens Martin University of Amsterdam Msc. Business Economics – Track Finance Thesis credits: 15 ECTS Date: June 30 th , 2017 Statement of Originality This document is written by Student Said Khaled Schakib who declares to take full responsibility for the contents of this document. I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it. The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents . Abstract This thesis aims to investigate the effect of domestic terrorism on the stock market in France. After an extensive analysis of considerable literature six potential industries were identified, which are believed to show significant response towards terrorist events. Based on the event study analysis, evidence is provided that terror attacks with high number of fatalities mostly have a short-term effect on excess stock returns. French stocks associated with the airline industry and leisure & tourism industry show the most negative decline in excess stock returns, while the results suggest that stocks associated with the defence industry respond with positive returns towards terrorist events Table of Content 1. Introduction ...................................................................................................................... 1 2. Literature Review ............................................................................................................. 3 3. Hypotheses ........................................................................................................................ 8 4. Methodology ................................................................................................................... 11 4.1 The Event Study Approach .................................................................................................. 11 4.2 The Market Model ................................................................................................................ 14 5. Data .................................................................................................................................. 16 6. Results ............................................................................................................................. 19 6.1 Tati store bombing ................................................................................................................ 19 6.2 Air France Flight 8969 Hijack ............................................................................................. 20 6.3 Paris Métro and RER bombings .......................................................................................... 21 6.4 Paris Métro bombing 1996 ................................................................................................... 22 6.5 Toulouse and Montauban shootings .................................................................................... 23 6.6 Charlie Hebdo attack ............................................................................................................ 24 6.7 Paris November attacks ........................................................................................................ 26 6.8 Truck attack in Nice ............................................................................................................. 28 6.9 Additional test analyses ........................................................................................................ 29 7. Conclusion ....................................................................................................................... 30 8. Appendix ......................................................................................................................... 32 References ........................................................................................................................... 40 List of Tables Table 1: Major terror events in France from 1986-2016 ....................................................................... 16 Table 2: Descriptive statistics ................................................................................................................ 17 Table 3: Event study results of event 1 ................................................................................................. 19 Table 4: Event study results of event 2 ................................................................................................. 20 Table 5: Event study results of event 3 ................................................................................................. 21 Table 6: Event study results of event 4 ................................................................................................. 22 Table 7: Event study results of event 5 ................................................................................................. 23 Table 8: Event study results of event 6 ................................................................................................. 24 Table 9: Event study results of event 7 ................................................................................................. 26 Table 10: Event study results of event 3 ............................................................................................... 28 Table 11: Results for event 1 of entire industries with additional tests ................................................. 32 Table 12:Results for event 2 of entire industries with additional tests .................................................. 33 Table 13:Results for event 3 of entire industries with additional tests .................................................. 34 Table 14:Results for event 4 of entire industries with additional tests .................................................. 35 Table 15:Results for event 5 of entire industries with additional tests .................................................. 36 Table 16:Results for event 6 of entire industries with additional tests .................................................. 37 Table 17:Results for event 7 of entire industries with additional tests .................................................. 38 Table 18:Results for event 8 of entire industries with additional tests .................................................. 39 1. Introduction Terrorism has arrived into the heartland of Europe, as the major attacks in Paris 2015 show. With the rise of terrorist groups such as the “Islamic State of Iraq and the Levant” (ISIL) and Europe's incapability of external border control, European countries are facing an unprecedented threat of terror. Especially France seems to move into the attention of terrorist groups, as recent incidents show. Several empirical studies suggest that major terrorist attacks have a significant negative impact on the economy. The 9/11 attacks for instance caused a loss of output of approximately $75 billion dollars according to the International Monetary Fund in the United States. This corresponds to a 0.7 percentage points decrease of the total US GDP. Against this background the question arises to what extent the increased threat of terrorism affects the French stock market. While literature examined its effects on stock markets in regions with a pronounced history of terrorism such as Israel, Turkey, the Middle East, Spain, UK and the US, the question arises whether France’s Stock markets react in comparable manners. The aim of this research is therefore to answer the question if significant abnormal returns do exist around terrorist events in France. If so, it would be interesting to know to what extent the reaction of stock returns can be observed for each industry. The final objective is to investigate whether the French stock market is able to absorb these terrorist events and if not, how long the different industries´ stocks need to rebound. Since media coverage exaggerates the negative impact of terrorism among economic and financial figures (Pirog, 2005), it is important to give the reader a more scientific view of this topic. Especially for investors it will be beneficial to know in detail how the past terror events affected French stocks in terms of portfolio diversification and risk management. In this paper I analyse eight major terror events in France between 1986-2016. I will identify the events with significant abnormal returns for six different industries that are partly found to be affected by terrorist events in previous literature. The six examined industries in this thesis are the following - Airline, leisure & tourism, insurances, oil & gas, media and defence. For the analysis I use the event study methodology, which is the most conventional approach for measuring the effects of abnormal returns after terrorist events. The results of this thesis are that primarily terror events with a relatively large number of casualties have a significant effect on particular French stocks, indicates the finding of previous literature. Out of the six analysed industries, stocks of the airline and leisure & tourism industry show the most negative significant responses towards terror events. In 1 contrast results of defence industry stock seem to be benefiting from terror events, indicating that investors expect