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ISA Research Tracks Impact of Terrorist Attacks on TASE Trading: Terrorist Attacks Promote Investor Shift to Government Bonds, Surgical Retaliation Does Not Affect Stock Prices


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Shares traded on the Tel Aviv Stock Exchange (TASE) decline on average 0.4% in response to terrorist attacks. In more than 30% of the intifada period, stock prices did not improve immediate after targeted counter-terrorism retaliation. These findings emerge from research published by the economic department of the Israel Securities Authority (ISA). The research was conducted by Prof. Shmuel Hauser, former chief economist of the ISA, Prof. Rafi Melnick and Dr. Rafi Eldor of the Interdisciplinary Center Herzliya.
Their empirical research examined the extent to which terrorist attacks and Israel’s counter-terrorism tactics affect the capital market in an economy experiencing a prolonged period of serial terrorism. The research, an event study, is based on a sample of some 460 terrorist events and 58 incidences of targeted retaliation against the leaders of terrorist organizations during the period, 2000-2003. It tracks stock movements surrounding the events to determine if systematic statistical patterns can be discerned. Within the framework of the study, Hauser, Melnick and Eldor build a composite “pessimism index”, based on variables characterizing terrorist events including: the location of the event, whether the event was a suicide attack, the number of casualties and press coverage of the event.
The major findings include the following: (1) share prices fall in response to terror activity. The reaction is immediate if the event occurs within trading hours, or at the beginning of the trading day, if occurring after the close of trade. On average, however, there is no evidence of either abnormal returns resulting from terrorist events or overshooting of subsequent price corrections. Price declines are not accompanied by an apparent increase in the overall level of uncertainty; (2) Israel’s counter-terrorism tactics do not offer relief to investors since share prices are barely affected by the targeted retaliations undertaken in response to these events; (3) the accumulation of terror activity causes investors to shift investments away from the stock market into low-risk fixed-income instruments such as short-term government bonds.
According to the “pessimism index”, the research finds that prices decrease more sharply as ranking on the pessimism index increases. The decline in share prices reflects an apparent belief by shareholders that continual terrorism causes a reduction in anticipated corporate profitability.

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