Terrorism and market risk assessment
Název práce v češtině: | |
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Název v anglickém jazyce: | Terrorism and market risk assessment |
Klíčová slova: | Terrorism,risk measures, event studies,international finance |
Klíčová slova anglicky: | Terrorism,risk measures, event studies,international finance |
Akademický rok vypsání: | 2013/2014 |
Typ práce: | diplomová práce |
Jazyk práce: | angličtina |
Ústav: | Institut ekonomických studií (23-IES) |
Vedoucí / školitel: | Mgr. Magdalena Patáková |
Řešitel: | skrytý![]() |
Datum přihlášení: | 11.01.2014 |
Datum zadání: | 11.01.2014 |
Datum a čas obhajoby: | 23.06.2015 00:00 |
Místo konání obhajoby: | IES |
Datum odevzdání elektronické podoby: | 06.05.2015 |
Datum proběhlé obhajoby: | 23.06.2015 |
Oponenti: | Mgr. Josef Brechler |
Kontrola URKUND: | ![]() |
Předběžná náplň práce |
Topics characteristics
Terrorist attacks on September 11, 2001 raise the question of the management of terrorism risk. They change the insurance market with the Terrorism Risk Insurance Act in 2002. Each insurer in the United States should propose an insurance policy against terrorism to all of their clients. Due to problems in measuring the impact of attacks on the market (see Straetmans in 2008), it is hard to catch a precise idea of the mechanisms ruling market reactions in response to the increase of such uncertainty. After 9/11, it seemed obvious that markets are negatively impacted by attacks (see Johnston & Nedelescu in 2006). The variable of interest in our work is the change in the volatility on the market and not abnormal returns. As a consequence, we study whether the uncertainty created by attacks leads to higher market risk in the period that follows. One important channel from attacks to increase in market risk is consequently the perception of the investors (see Garvey & Mullins in 2006) on different markets and how this perception could change from one country to another. These investors evolve in a globalized world and so the effect of terrorist’s attacks could spread on the whole world with different impacts (see Abadie & Gardeazabal in 2008). This perception depends moreover on the tools used by the analysts to measure risks. These tools are often a variance-based analysis. In changing the variance of a portfolio, and creating large deviations, terrorism may change the value of these measures and their accuracy. Hypotheses 1- Hypothesis #1: Terrorist attacks have an impact on markets. 2- Hypothesis #2: This effect spreads to the world markets. 3- Hypothesis #3: The market risk perception depends on the region and on the terrorist history of each country. 4- Hypothesis #4: Some markets benefit from terrorist attacks Methodology The paper will focus on the influence of the 9/11 events (considered as an increase in the terrorist risk) on a number of stock indices. I will use a heteroskedasticity-based estimation model and identify periods of stress due to an increase in terrorism risk perception. A comparison between the variance covariance matrix for the common factors of the indices on terrorism during stress period (basically after 09/11) and non-stress period (before 09/11) will lead to an estimation of the impact of terrorism on market volatility. I will compare variance-covariance estimations on different markets’ indices differing by their geographical and cultural linkage to the US. Afterward I will demonstrate the effects of such heteroskedasticity on classical risk-measurement tools (such as VaR, results of Extreme Value Theory). Outline I. Definition of key concepts : a) What is terrorism? Which impact does it have? b) What is market risk? d) How to measure market risk in the framework of unpredictable events? II. Terror and market risks: Previous analysis and studies’ issues a) History: Analysis of different attacks on the market risk b) Terrorist attacks and the hypothesis of efficient markets c) Behavioral approach of the impact of terror on investors d) Assessment of the likelihood of the attacks e) Attacks and international finance: How can we explain the spillover and contagion effects? III. Empirical Model : 09/11 Terrorism and world financial markets a) Methodology b) Data description c) Model definition and results IV. Discussion of the results V. Conclusion Bibliography - Abadie, A., & Gardeazabal, J. (2003). The economic costs of conflict: A case study of the Basque Country. American economic review, 113-132. - Abadie, A., & Gardeazabal, J. (2008). Terrorism and the world economy.European Economic Review, 52(1), 1-27. - Amihud, Y. & Wohl, A. (2004) “Political news and stock prices: The case of Saddam Hussein contracts” Journal of Banking and Finance, Forthcoming. - Chen, A. H., & Siems, T. F. (2004). The effects of terrorism on global capital markets. European Journal of Political Economy, 20(2), 349-366. - Drakos, K. (2009). Big questions, little answers: Terrorism activity, investor sentiment and stock returns. Economics of Security Working Paper Series, 8. - Ellstrand, A. E., Tihanyi, L., & Johnson, J. L. (2002). Board structure and international political risk. Academy of Management Journal, 45(4), 769-777. - Fama, E., Fisher, L., Jensen, M., & Roll, R. (1969). The adjustment of stock prices to new information. International economic review, 10. - Garvey, J., & Mullins, M. (2008). Contemporary terrorism: risk perception in the London options market. Risk Analysis, 28(1), 151-160. - Gilli, M. (2006). An application of extreme value theory for measuring financial risk. Computational Economics, 27(2-3), 207-228. - Johnston, R. B., & Nedelescu, O. M. (2006). The impact of terrorism on financial markets. Journal of Financial Crime, 13(1), 7-25. - Kunreuther, H., & Michel-Kerjan, E. (2004). Policy watch: challenges for terrorism risk insurance in the United States (No. w10870). National Bureau of Economic Research. - Leigh, A., Wolfers J.,& Zitzewitz E. (2003), “What Do Financial Markets Think of War in Iraq?” NBER Working Paper no. 9587. - Rigobon, R., & Sack, B. (2005). The effects of war risk on US financial markets.Journal of banking & finance, 29(7), 1769-1789. Basque country - Straetmans, S. T., Verschoor, W. F., & Wolff, C. C. (2008). Extreme US stock market fluctuations in the wake of 9/11. Journal of Applied Econometrics, 23(1), 17-42. - Zussman, A., & Zussman, N. (2006). Assassinations: evaluating the effectiveness of an Israeli counterterrorism policy using stock market data. The Journal of Economic Perspectives, 20(2), 193-206. |
Předběžná náplň práce v anglickém jazyce |
Topics characteristics
Terrorist attacks on September 11, 2001 raise the question of the management of terrorism risk. They change the insurance market with the Terrorism Risk Insurance Act in 2002. Each insurer in the United States should propose an insurance policy against terrorism to all of their clients. Due to problems in measuring the impact of attacks on the market (see Straetmans in 2008), it is hard to catch a precise idea of the mechanisms ruling market reactions in response to the increase of such uncertainty. After 9/11, it seemed obvious that markets are negatively impacted by attacks (see Johnston & Nedelescu in 2006). The variable of interest in our work is the change in the volatility on the market and not abnormal returns. As a consequence, we study whether the uncertainty created by attacks leads to higher market risk in the period that follows. One important channel from attacks to increase in market risk is consequently the perception of the investors (see Garvey & Mullins in 2006) on different markets and how this perception could change from one country to another. These investors evolve in a globalized world and so the effect of terrorist’s attacks could spread on the whole world with different impacts (see Abadie & Gardeazabal in 2008). This perception depends moreover on the tools used by the analysts to measure risks. These tools are often a variance-based analysis. In changing the variance of a portfolio, and creating large deviations, terrorism may change the value of these measures and their accuracy. Hypotheses 1- Hypothesis #1: Terrorist attacks have an impact on markets. 2- Hypothesis #2: This effect spreads to the world markets. 3- Hypothesis #3: The market risk perception depends on the region and on the terrorist history of each country. 4- Hypothesis #4: Some markets benefit from terrorist attacks Methodology The paper will focus on the influence of the 9/11 events (considered as an increase in the terrorist risk) on a number of stock indices. I will use a heteroskedasticity-based estimation model and identify periods of stress due to an increase in terrorism risk perception. A comparison between the variance covariance matrix for the common factors of the indices on terrorism during stress period (basically after 09/11) and non-stress period (before 09/11) will lead to an estimation of the impact of terrorism on market volatility. I will compare variance-covariance estimations on different markets’ indices differing by their geographical and cultural linkage to the US. Afterward I will demonstrate the effects of such heteroskedasticity on classical risk-measurement tools (such as VaR, results of Extreme Value Theory). Outline I. Definition of key concepts : a) What is terrorism? Which impact does it have? b) What is market risk? d) How to measure market risk in the framework of unpredictable events? II. Terror and market risks: Previous analysis and studies’ issues a) History: Analysis of different attacks on the market risk b) Terrorist attacks and the hypothesis of efficient markets c) Behavioral approach of the impact of terror on investors d) Assessment of the likelihood of the attacks e) Attacks and international finance: How can we explain the spillover and contagion effects? III. Empirical Model : 09/11 Terrorism and world financial markets a) Methodology b) Data description c) Model definition and results IV. Discussion of the results V. Conclusion Bibliography - Abadie, A., & Gardeazabal, J. (2003). The economic costs of conflict: A case study of the Basque Country. American economic review, 113-132. - Abadie, A., & Gardeazabal, J. (2008). Terrorism and the world economy.European Economic Review, 52(1), 1-27. - Amihud, Y. & Wohl, A. (2004) “Political news and stock prices: The case of Saddam Hussein contracts” Journal of Banking and Finance, Forthcoming. - Chen, A. H., & Siems, T. F. (2004). The effects of terrorism on global capital markets. European Journal of Political Economy, 20(2), 349-366. - Drakos, K. (2009). Big questions, little answers: Terrorism activity, investor sentiment and stock returns. Economics of Security Working Paper Series, 8. - Ellstrand, A. E., Tihanyi, L., & Johnson, J. L. (2002). Board structure and international political risk. Academy of Management Journal, 45(4), 769-777. - Fama, E., Fisher, L., Jensen, M., & Roll, R. (1969). The adjustment of stock prices to new information. International economic review, 10. - Garvey, J., & Mullins, M. (2008). Contemporary terrorism: risk perception in the London options market. Risk Analysis, 28(1), 151-160. - Gilli, M. (2006). An application of extreme value theory for measuring financial risk. Computational Economics, 27(2-3), 207-228. - Johnston, R. B., & Nedelescu, O. M. (2006). The impact of terrorism on financial markets. Journal of Financial Crime, 13(1), 7-25. - Kunreuther, H., & Michel-Kerjan, E. (2004). Policy watch: challenges for terrorism risk insurance in the United States (No. w10870). National Bureau of Economic Research. - Leigh, A., Wolfers J.,& Zitzewitz E. (2003), “What Do Financial Markets Think of War in Iraq?” NBER Working Paper no. 9587. - Rigobon, R., & Sack, B. (2005). The effects of war risk on US financial markets.Journal of banking & finance, 29(7), 1769-1789. Basque country - Straetmans, S. T., Verschoor, W. F., & Wolff, C. C. (2008). Extreme US stock market fluctuations in the wake of 9/11. Journal of Applied Econometrics, 23(1), 17-42. - Zussman, A., & Zussman, N. (2006). Assassinations: evaluating the effectiveness of an Israeli counterterrorism policy using stock market data. The Journal of Economic Perspectives, 20(2), 193-206. |