The impact of domestic and international terrorism on equity markets: evidence from Indonesia

Abstract

Purpose

The purpose of this paper is to show that the consequences of terrorist attacks are beyond what is reported in the media. Equity investors can be adversely affected by these incidents. The authors' work justifies the war on terror.

Design/methodology/approach

Using event study methodology, the authors test how abnormal returns have changed for industrial portfolios in Indonesia following the recent terrorist attacks in the USA, the UK, Spain, India and even Indonesia. The authors adjust the CAPM to test whether systematic risks are altered around these events.

Findings

The findings show that equity portfolios were adversely affected by the September 11 attacks and Bali bombings. The domestic terrorist attack generated the worst outcomes. It appears that systematic risk has increased by the amount of terrorist risk. Other attacks in London, Madrid and Mumbai were minimal.

Originality/value

This study shows how domestic and international terrorist events affect the risk and return in an Asian capital market.

Citation

Ramiah, V. and Graham, M. (2013), "The impact of domestic and international terrorism on equity markets: evidence from Indonesia", International Journal of Accounting & Information Management, Vol. 21 No. 1, pp. 91-107. https://doi.org/10.1108/18347641311299768