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Study: Terrorist Acts have Little Impact on Global Financial Markets

Sanjay Goel is a professor of business.

ALBANY, N.Y. (Feb. 1, 2018) – The global cost of terrorism measures in billions of dollars each year – as much as $84 billion in 2016 alone, according to the 2017 Global Terrorism Index. Researchers at UAlbany have found, however, that terroristic incidents have little discernible impact on global financial markets.

The team examined the 32 worst terroristic incidents in the United States and 16 incidents from throughout the world over a span of two decades. The findings indicate that terrorism does not have a “significant or lasting economic impact on stock and bond market returns,” according the study.

“If you look at the primary goal of terrorism, it’s to create chaos and cause fear,” said Sanjay Goel, one of the researchers involved with the study and a professor of business at UAlbany. “But the real, material damage is not that much.”

Exceptions to this general finding are extreme events that “change the world’s consciousness,” he said, citing 9/11 and the 2005 London tube bombings as two examples that did in fact alter what he calls investor psychology.

“The psychological impact [of terroristic incidents] is large, but markets are efficient and see through this,” he said. The markets discern, in other words, “that there’s no real impact on any specific company.”

The high frequency of terrorist incidents and the media coverage these incidents invariably attract have combined to desensitize the public, making it less likely for pessimism to percolate into financial markets, according to the study’s findings.

This should encourage investors and governments, Goel said.

“For the government, it’s reassuring that terrorist incidents won’t suddenly crash the stock market,” he said. “The same thing for investors: They shouldn’t be worried about terrorist incidents because those don’t impact the stock market.”

Investors and chief executives should instead focus on policy changes and cyber security breaches, two more likely suspects when significant negative financial impacts on markets worldwide are evidenced, according to Goel.

He said these surprising findings have informed his next research topic, which is comparing the impact of security breaches within various industries.

On the research team with Goel were Hany Shawky, professor of finance in the School of Business at UAlbany, and Seth Cagle, who is with the Health Information Exchange in New York.
The study was published in the Journal of Financial Stability.

Goel is on the faculty for UAlbany’s Institute for Financial Market Regulation. He also serves as director of research at the NYS Center for Information and Forensics and Assurance and the director of UAlbany’s digital forensics program.

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