Title: The Impact Of Terrorism On Turkish Stock Exchange Market

1. Introduction

There are different environmental factors that have impact on the operations of business concerns as well as financial markets. Terrorism is considered to be an external risk which is difficult to define. As per Chulia et al., (2009) terrorism is considered to be a phenomenon in which use of violence and threat is done to attain specific targets, and its objective is to spread fear among people, are against the humanitarian rules/laws and causes loss to the government and state. The main purpose of this research is to analyse the impact of terrorist activities on Turkish stock exchange market and stock exchange index. The terrorism has become a main threat around the world from past many years and it has economic effect as well (Abadie and Gardeazabal, 2008). Moreover, it was also stated that the terrorist attacks can negatively influence the stock and financial markets of any country. The stock market agents have to make strategies and plans to cope with different risks including terrorism, political instability, natural disasters and war. It was mentioned by Feridun (2011) that Turkey has experienced different terrorist attacks and shocks in past and various terrorist groups have operated in this country, having connections with international terrorist groups including Al_Qaeda. According to Berrebi and Klor (2010) the Turkish stock exchange is one of the emerging stock markets around the world and it has more than 300 listed companies. In addition, the terrorism activities in the past negatively impacted the Turkish stock exchange market. Moreover, the terrorist’s activities in future can also have an impact on the TSE. In this research, it will be analysed that how the stock exchange market of Turkey was impacted due to past terrorism activities and how the market agents behaved and handled the situation. Different indices from Turkish Stock Exchange market will be taken under consideration for calculations. In this research, the positivist approach will be used and data for past 10 years will be gathered and analysed for 10 different sectors in Turkey. The impact of terrorism on stock indices of 10 major sectors will be analysed in detail and different statistical tests will be carried out for analysis. There will be different sections of this research including literature review, methodology and analysis, and the whole research will be concluded at the end. Moreover, various past papers and researches will be studied to analyse the efficiency of Turkish Stock Exchange market.

Literature review

In this section of research, the past studies and researchers conducted by different scholars related with impact of terrorism on stock exchange markets will be discussed. However, the studies are conducted in different context and in different countries because the terrorist activities are present around the world. With the help of these studies, a background for study will be drawn and it will provide directions for the researcher.

As per study conducted by Abadie and Gardeazabal (2008) terrorism decreases the extern investment returns because of high uncertainty, and that is why the changes in the terrorism intensity can lead towards movements of capital from one country to another.  This indicates that the country which faces high intensity of terrorism can lose their capital and financial resources. It was mentioned by Chen and Siems (2004) that different countries can be negatively influenced due to terrorism activities in one country. They focused on the terrorism activity of 9/11 in US and found that it had negative impact on the US capital markets along with global stock exchange markets. In addition, the impact of 9/11 was also studied by Nikkinen et al, (2008) and they found that the terrorism activity in US influenced more than 53 markets around the globe. It was also mentioned by the researchers that high volatility as well as short-run negative effects differ across countries on the basis of intensities of their integration into the international economy. This indicate that the terrorism activities happening in one country not only effects the financial and capital markets in the local economy but can have highly negative impacts on international economies and stock exchanges.

Drakos (2010) focused on one of the biggest terrorism activity in US, which is 9/11 attacks and he specifically paid attention on the share values of airline sector. He found that the stock market valuation of airline shares was harmfully and considerably impacted because of changed risk perceptions by customers. Due to this issue, the demand of air level decreased and consumers’ attention towards insurance increased. Due to this, the share value of airlines decreased on the stock exchange and the market agents had to face different issues and problems. Eldor and Melnick (2004) conducted the study to evaluate the influence of terrorism on Tel Aviv Stock Exchange as well as Israel’s foreign exchange market and found that the foreign exchange market was impacted but there was no influence on the TASE. This indicates that the impact of terrorism may not be diverse. Different scholars carried out studies on the basis of various terrorist acts around the world and analysed their impact on working of stock exchange markets. According to Kollias et al., (2011) Athens and London stock exchanges were negatively influenced due to various terrorist attacks in Europe and the stock exchange indices were decreased due to various terrorist activities. In addition, the foreign investors get their investment out of the countries due to high threat of terrorism activities. This indicates that the stock values and stock indices are decreased due to terrorism activities in different countries.

It was mentioned by Feridun and Sezgin (2008) that terrorism impacts the local as well as international economies along with the financial markets and stock exchange index. In addition, it was mentioned that due to terrorism the risk aversion attitude of customers, decrease in real investment activity as well as slowing down economic progress, and by spilling over to commodity markets, bond markets and currency markets. Moreover, it was also stated that it is highly important for the policy makers, government as well as investors and shareholders to understand the intensity of terrorist acts so that right designs can be made at the right time. It was stated by that Ozsoy and Sahin (2006) economists have taken various steps to calculate the economic influence of terrorism activities but they have failed to fully understand the financial cost of terrorism activities. In addition, the terrorism risk is a new kind of disastrous risk that investors of different countries are facing. Moreover, the terrorism activities along with other unexpected disastrous activities can have negative impacts on the stock values and the investors can face losses. In this research, the impact of terrorist activities on the Turkish stock market will be deeply investigated and the stock market indexes will be analysed for past 10 years in different sectors.

A study was conducted by Yaya (2009) to analyse the influence of terrorism on the economy and they found that the terrorism activities can boost the perception of risk and reduce the expected returns that have direct impact on the investment capital’s allocation. It was also found by the researchers that when the terrorism risk in a country is high then the quantity of FDI considerably low and the foreign investors can face losses. The researchers have conducted studies specific with different sectors and countries.  According to Glaser and Weber (2005) the terrorist attacks can impact different economies around the world and it was found that the impact of terrorism varies from country to country and region to region. However, generally the terrorist attacks yields negative and significant abnormal returns on investments.  Different cases and terrorist activities were analysed by Mun (2005) and was found that financial markets are directly or indirectly impacted by terrorism. Moreover, they found that the terrorism activities in Madrid and New York increased created uncertainty as well as volatility in the financial markets of both countries and in various other countries as well. However, the New York event had the global impact while the attacks in Madrid had regional impacts and it influenced different stock exchanges around the world. It was also found that those in New York were seen as having global effect. According to study carried out by Arin et al., (2008) the terrorist activities changes the stock exchange and market behaviors and the data was collected from six different financial markets including Turkey, Indonesia, Spain as well as Israel, UK and Thailand. It was found that the impact of terrorist is higher on the emerging markets.

It is indicated by reviewing past studies and researches that different scholars have tried to evaluate the impact of terrorist activities on the stock exchange market and they have found different results. By conducting current study, it will be analysed that how the recent terrorist attacks has impacted the Turkish stock exchange market and index.

References

Abadie, A. and Gardeazabal, J., 2008. Terrorism and the world economy. European Economic Review, 52(1), pp.1-27.

Arin, K.P., Ciferri, D. and Spagnolo, N., 2008. The price of terror: The effects of terrorism on stock market returns and volatility. Economics Letters, 101(3), pp.164-167.

Berrebi, C. and Klor, E.F., 2010. The impact of terrorism on the defence industry. Economica, 77(307), pp.518-543.

Chen, A.H. and Siems, T.F., 2004. The effects of terrorism on global capital markets. European Journal of Political Economy, 20(2), pp.349-366.

Chuliá, H., Climent, F., Soriano, P. and Torró, H., 2009. Volatility transmission patterns and terrorist attacks. Quantitative Finance, 9(5), pp.607-619.

Drakos, K., 2010. Terrorism activity, investor sentiment, and stock returns. Review of Financial Economics, 19(3), pp.128-135.

Eldor, R. and Melnick, R., 2004. Financial markets and terrorism. European Journal of Political Economy, 20(2), pp.367-386.

Glaser, M. and Weber, M., 2005. September 11 and stock return expectations of individual investors. Review of Finance, 9(2), pp.243-279.

Feridun, M., 2011. Impact of terrorism on tourism in Turkey: empirical evidence from Turkey. Applied Economics, 43(24), pp.3349-3354.

Feridun, M. and Sezgin, S., 2008. Regional underdevelopment and terrorism: the case of south eastern Turkey. Defence and Peace Economics, 19(3), pp.225-233.

Kollias, C., Papadamou, S. and Stagiannis, A., 2011. Terrorism and capital markets: The effects of the Madrid and London bomb attacks. International Review of Economics & Finance, 20(4), pp.532-541.

Mun, K.C., 2005. Contagion and impulse response of international stock markets around the 9–11 terrorist attacks. Global Finance Journal, 16(1), pp.48-68.

Nikkinen, J., Omran, M.M., Sahlström, P. and Äijö, J., 2008. Stock returns and volatility following the September 11 attacks: Evidence from 53 equity markets. International Review of Financial Analysis, 17(1), pp.27-46.

Ozsoy, O. and Sahin, H., 2006. Direct and indirect effects of terrorism on the Turkish economy. International Journal of Business Management and Economics, 2(1), pp.59-74.

Yaya, M.E., 2009. Terrorism and tourism: The case of Turkey. Defence and Peace Economics, 20(6), pp.477-497.