Terrorism and the Stock Market: A Case Study for Turkey Using STR Models
DOI:
https://doi.org/10.6000/1929-7092.2014.03.17Keywords:
Stock market, Terrorist activity, STR nonlinearityAbstract
Several attempts have been made in the literature to analyze the detrimental effects of terrorist activities on the stock market. However, in neither of these studies the effects of terrorist activities on stock returns are investigated through employing nonlinear models in spite of the fact that most financial data is shown to exhibit nonlinear behaviour. This study, therefore, aims to contribute to this growing area of research by exploring the potential nonlinear effects of terrorist activities on stock returns by employing smooth transition regression (STR) models. Our results show that terrorism has a statistically significant negative effect on the stock index when the intensity of terrorist activities passes a certain threshold level. This negative effect continues for terrorist activities below this threshold level, but becomes statistically insignificant. This study by conducting the analysis within a nonlinear framework offers important insights into the investors who want to make portfolio diversification strategies against terrorism risk.
References
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http://dx.doi.org/10.1080/10242690701775509
Arin, K. Peren, Davide Ciferri, and Nicola Spagnolo. 2008. “The price of terror: The effects of terrorism on stock market returns and volatility.” Economics Letters 101(3):164- 167.
http://dx.doi.org/10.1016/j.econlet.2008.07.007
Bollerslev, Tim 1986. “Generalized Autoregressive Conditional Heteroskedasticity.” Journal of Econometrics 31:307-327.
http://dx.doi.org/10.1016/0304-4076(86)90063-1
Campbell, John Y, Andrew W. Lo, and Craig MacKinlay. 1997. The Econometrics of Financial Markets. Princeton: Princeton University Press.
Chan, Felix and Michael McAleer. 2002. “Maximum Likelihood Estimation of STAR and STAR-GARCH Models: Theory and Monte Carlo Evidence.” Journal of Applied Econometrics 17(5):509-534.
http://dx.doi.org/10.1002/jae.686
Chan, Felix and Michael McAleer. 2003. “Estimating Smooth Transition Autoregressive Models with GARCH Errors in the Presence of Extreme Observations and Outliers.” Applied Financial Economics 13(8):581-592.
http://dx.doi.org/10.1080/0960310022000029295
Chen, Andrew H. and Thomas F. Siems. 2004. “The Effects of Terrorism on Global Capital Markets.” European Journal of Political Economy 20(2):349–366.
http://dx.doi.org/10.1016/j.ejpoleco.2003.12.005
Chesney, Marc, Ganna Reshetar and Mustafa Karaman. 2011. “The Impact of Terrorism on Financial Markets: An Empirical Study.” Journal of Banking and Finance 35(2):253-267.
http://dx.doi.org/10.1016/j.jbankfin.2010.07.026
Eitrheim, Øyvind and Timo Teräsvirta. 1996. “Testing the Adequacy of Smooth Transition Autoregressive Models.” Journal of Econometrics 74(1):59-75.
http://dx.doi.org/10.1016/0304-4076(95)01751-8
Eldor, Rafi and Rafi Melnick. 2004. “Financial Markets and Terrorism.” European Journal of Political Economy 20(2):367–386.
http://dx.doi.org/10.1016/j.ejpoleco.2004.03.002
Engle, Robert F. 1982. “Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation.” Econometrica 50(4):987-1007.
http://dx.doi.org/10.2307/1912773
Ljung, Greta M. and George E. P. Box. 1978. “On a Measure of Lack of Fit in Time Series Models.” Biometrika 65:297–303.
http://dx.doi.org/10.1093/biomet/65.2.297
Hasanov, Mübariz and Tolga Omay. 2008. “Nonlinearities in Emerging Stock Markets: Evidence From Europe's Two Largest Emerging Markets."" Applied Economics 40(20):2645-2658.
http://dx.doi.org/10.1080/00036840600970310
He, Hua and David M. Modest. 1995. “Market Frictions and Consumption-Based Asset Pricing.” Journal of Political Economy 103(1):94–117.
http://dx.doi.org/10.1086/261977
Granger, Clive W.J. and Timo Teräsvirta. 1993. Modelling Nonlinear Economic Relationships. Advanced Texts in Econometrics. Oxford University Press.
Johnston, R. Barry and Oana M. Nedelescu. 2005.“The Impact of Terrorism on Financial Markets.” IMF Working Paper: WP/05/60.
Karolyi, G. Andrew. 2006. “Shock Markets: What Do We Know About Terrorism and the Financial Markets? Canadian Investment Review.
Karolyi, G. Andrew and Martell, R., 2005. “Terrorism and the Stock Market.” Ohio State University WP.
Lundbergh, Stefan and Timo Teräsvirta. 1998. “Modelling Economic High-Frequency Time Series with STAR-STGARCH Models.” Stockholm School of Economics Working Paper Series in Economics and Finance No 291.
McMillan, David G. 2003. “Non-linear Predictability of UK Stock Market Returns.” Oxford Bulletin of Economics and Statistics 65(5):557-573.
http://dx.doi.org/10.1111/j.1468-0084.2003.00061.x
Omay, Tolga, Bahar Araz-Takay, Ay?egül Eruygur, and ?lker Kilic. 2013. ""The Effects of Terrorist Activities on Foreign Direct Investment: Nonlinear Evidence from Turkey."" Review of Economics 64(2):139-158.
Pötscher. Benedict M. and Ingmar V. Prucha. 1997. Dynamic Nonlinear Econometric Models: Asymptotic Theory. Berlin: Springer-Verlag.
Teräsvirta, Timo and Heather M. Anderson. 1992. “Characterizing Nonlinearities in Business Cycles Using Smooth Transition Autoregressive Models.” Journal of Applied Econometrics 7(S1):119-36.
http://dx.doi.org/10.1002/jae.3950070509
Van Dijk, Dirk Jacobus Cornelis. 1999. “Smooth Transition Models: Extensions and Outlier Robust Inference.” Tinbergen Institute Research Series No: 200.
White, Halbert and Ian Domowitz. 1984. “Nonlinear Regression with Dependent Observations.” Econometrica 52(1):143-162.
http://dx.doi.org/10.2307/1911465
http://dx.doi.org/10.1080/10242690701775509
Arin, K. Peren, Davide Ciferri, and Nicola Spagnolo. 2008. “The price of terror: The effects of terrorism on stock market returns and volatility.” Economics Letters 101(3):164- 167.
http://dx.doi.org/10.1016/j.econlet.2008.07.007
Bollerslev, Tim 1986. “Generalized Autoregressive Conditional Heteroskedasticity.” Journal of Econometrics 31:307-327.
http://dx.doi.org/10.1016/0304-4076(86)90063-1
Campbell, John Y, Andrew W. Lo, and Craig MacKinlay. 1997. The Econometrics of Financial Markets. Princeton: Princeton University Press.
Chan, Felix and Michael McAleer. 2002. “Maximum Likelihood Estimation of STAR and STAR-GARCH Models: Theory and Monte Carlo Evidence.” Journal of Applied Econometrics 17(5):509-534.
http://dx.doi.org/10.1002/jae.686
Chan, Felix and Michael McAleer. 2003. “Estimating Smooth Transition Autoregressive Models with GARCH Errors in the Presence of Extreme Observations and Outliers.” Applied Financial Economics 13(8):581-592.
http://dx.doi.org/10.1080/0960310022000029295
Chen, Andrew H. and Thomas F. Siems. 2004. “The Effects of Terrorism on Global Capital Markets.” European Journal of Political Economy 20(2):349–366.
http://dx.doi.org/10.1016/j.ejpoleco.2003.12.005
Chesney, Marc, Ganna Reshetar and Mustafa Karaman. 2011. “The Impact of Terrorism on Financial Markets: An Empirical Study.” Journal of Banking and Finance 35(2):253-267.
http://dx.doi.org/10.1016/j.jbankfin.2010.07.026
Eitrheim, Øyvind and Timo Teräsvirta. 1996. “Testing the Adequacy of Smooth Transition Autoregressive Models.” Journal of Econometrics 74(1):59-75.
http://dx.doi.org/10.1016/0304-4076(95)01751-8
Eldor, Rafi and Rafi Melnick. 2004. “Financial Markets and Terrorism.” European Journal of Political Economy 20(2):367–386.
http://dx.doi.org/10.1016/j.ejpoleco.2004.03.002
Engle, Robert F. 1982. “Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation.” Econometrica 50(4):987-1007.
http://dx.doi.org/10.2307/1912773
Ljung, Greta M. and George E. P. Box. 1978. “On a Measure of Lack of Fit in Time Series Models.” Biometrika 65:297–303.
http://dx.doi.org/10.1093/biomet/65.2.297
Hasanov, Mübariz and Tolga Omay. 2008. “Nonlinearities in Emerging Stock Markets: Evidence From Europe's Two Largest Emerging Markets."" Applied Economics 40(20):2645-2658.
http://dx.doi.org/10.1080/00036840600970310
He, Hua and David M. Modest. 1995. “Market Frictions and Consumption-Based Asset Pricing.” Journal of Political Economy 103(1):94–117.
http://dx.doi.org/10.1086/261977
Granger, Clive W.J. and Timo Teräsvirta. 1993. Modelling Nonlinear Economic Relationships. Advanced Texts in Econometrics. Oxford University Press.
Johnston, R. Barry and Oana M. Nedelescu. 2005.“The Impact of Terrorism on Financial Markets.” IMF Working Paper: WP/05/60.
Karolyi, G. Andrew. 2006. “Shock Markets: What Do We Know About Terrorism and the Financial Markets? Canadian Investment Review.
Karolyi, G. Andrew and Martell, R., 2005. “Terrorism and the Stock Market.” Ohio State University WP.
Lundbergh, Stefan and Timo Teräsvirta. 1998. “Modelling Economic High-Frequency Time Series with STAR-STGARCH Models.” Stockholm School of Economics Working Paper Series in Economics and Finance No 291.
McMillan, David G. 2003. “Non-linear Predictability of UK Stock Market Returns.” Oxford Bulletin of Economics and Statistics 65(5):557-573.
http://dx.doi.org/10.1111/j.1468-0084.2003.00061.x
Omay, Tolga, Bahar Araz-Takay, Ay?egül Eruygur, and ?lker Kilic. 2013. ""The Effects of Terrorist Activities on Foreign Direct Investment: Nonlinear Evidence from Turkey."" Review of Economics 64(2):139-158.
Pötscher. Benedict M. and Ingmar V. Prucha. 1997. Dynamic Nonlinear Econometric Models: Asymptotic Theory. Berlin: Springer-Verlag.
Teräsvirta, Timo and Heather M. Anderson. 1992. “Characterizing Nonlinearities in Business Cycles Using Smooth Transition Autoregressive Models.” Journal of Applied Econometrics 7(S1):119-36.
http://dx.doi.org/10.1002/jae.3950070509
Van Dijk, Dirk Jacobus Cornelis. 1999. “Smooth Transition Models: Extensions and Outlier Robust Inference.” Tinbergen Institute Research Series No: 200.
White, Halbert and Ian Domowitz. 1984. “Nonlinear Regression with Dependent Observations.” Econometrica 52(1):143-162.
http://dx.doi.org/10.2307/1911465
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Published
2014-07-11
How to Cite
Eruygur, A. Çorakçi, & Omay, T. (2014). Terrorism and the Stock Market: A Case Study for Turkey Using STR Models. Journal of Reviews on Global Economics, 3, 220–227. https://doi.org/10.6000/1929-7092.2014.03.17
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