The determinants of terrorist shocks' cross‐market transmission

Konstantinos Drakos (Department of Accounting and Finance, Athens University of Economics and Business, Athens, Greece and Network for the Economic Analysis of Terrorism, Berlin, Germany)

Journal of Risk Finance

ISSN: 1526-5943

Publication date: 2 March 2010



The purpose of this paper is to explore the determinants of the cross‐market transmission mechanism for terrorist shocks, focusing on two major terrorist events and 68 national stock markets.


The paper generates daily abnormal returns from a three‐factor world asset‐pricing model. Abnormal returns are then regressed on proxies of three transmission mechanisms; a world integration channel, a bilateral integration channel, and a liquidity channel.


The findings indicate that terrorism shocks are diffused cross‐nationally in a non‐uniform manner. This paper finds empirical support for all three channels when considered separately. The bilateral integration channel contains the highest explanatory power since it is found that a third country's trade linkages with the “ground‐zero” country explain about 24 percent of the stock market reaction. A country's share in the world trade, a proxy for the world integration channel, is able to explain about 12 percent of abnormal‐return variation, while the liquidity channel exhibits the lowest predictive power, with the value of stock trading explaining about 6 percent. A hybrid model, where proxies for all channels are included, shows that only the bilateral trade linkages with the “ground‐zero” country are significant determinants of the stock market reaction.

Practical implications

Provides evidence useful for portfolio management and authorities' assessment of terrorist shocks' impact on capital markets.


It is the first study that investigates the determinants of cross‐market transmission of terrorist shocks.



Drakos, K. (2010), "The determinants of terrorist shocks' cross‐market transmission", Journal of Risk Finance, Vol. 11 No. 2, pp. 147-163.

Download as .RIS



Emerald Group Publishing Limited

Copyright © 2010, Emerald Group Publishing Limited

Please note you might not have access to this content

You may be able to access this content by login via Shibboleth, Open Athens or with your Emerald account.
If you would like to contact us about accessing this content, click the button and fill out the form.
To rent this content from Deepdyve, please click the button.