Terrorism and International Stock Returns

Abstract We develop a terrorism risk factor and show its statistical and economic relevance to stock returns. Using time-series data from 40 stock markets around the world, we show that our terrorism factor has a statistically strong contemporaneous effect on countries’ stock returns and is able to predict returns for approximately 53% of the countries in our sample. Our findings suggest that the source of this predictability is via both the discount rate and cash flow channels. Our results survive a battery of robustness tests, including tests based on multiple proxies for the terrorism factor.