An Empirical Analysis of Terrorism and Stock Market Spillovers: The Case of Spain

Received: 14 June 2021, Revised: 22 June 2021, Accepted: 05 Sep 2021, Available online: 08 Sep 2021, Version of Record: 08 Sep 2021

Ricardo Laborda
&
Jose Olmo

Abstract


This article assesses the spillover effects between terrorist activity and Spanish stock market returns for the period 1993–2017 . We construct a daily terror index that reflects the terrorist activity of different types of perpetrators: domestic terrorism (ETA) and international terrorism linked to Islamic extremism. Our static analysis shows that connectedness is important, as it explains about half of the forecast error variance; most of it is attributed to shocks from terrorist events on stock market return forecasts. Our dynamic analysis also uncovers an increase in spillover effects between the early period characterised by ETA terrorist attacks and the recent past characterised by Islamic terrorist attacks.
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Conflict of interest


“Authors state no conflict of interest”


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This research received no external funding or grants


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Peer review under responsibility of Defence Science Journal


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