Original Research

The impact of disasters and terrorism on the stock market

Tchai Tavor, Sharon Teitler-Regev
Jàmbá: Journal of Disaster Risk Studies | Vol 11, No 1 | a534 | DOI: https://doi.org/10.4102/jamba.v11i1.534 | © 2019 Tchai Tavor, Sharon Teitler-Regev | This work is licensed under CC Attribution 4.0
Submitted: 24 August 2017 | Published: 21 January 2019

About the author(s)

Tchai Tavor, Department of Economics and Management, The Max Stern Yezreel Valley Academic College, Israel
Sharon Teitler-Regev, Department of Economics and Management, The Max Stern Yezreel Valley Academic College, Israel


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Abstract

The growing number of negative events worldwide, among them natural disasters, artificial disasters and terrorism, has led the public to focus attention on the impact of such events on the economy and the capital market. This research examines the effects of natural disasters, artificial disasters and terrorism on the stock market in order to reveal profit opportunities. In this research, we collected data on 344 significant events that received media attention and examined the differences between the three types of events using the Pessimism Index. Some of the results include the following: (1) natural disasters cause the greatest damage to the economy, whereas terrorism causes the least damage; (2) natural disasters exhibit the highest level of severity, whereas artificial disasters have the lowest severity. The research reveals some opportunities for investors to obtain arbitrage profits. During natural disasters, the stock index decreases on the day of the events and on the two subsequent days. Therefore, investors should short sell the index on the day of the disaster and hold it for 2 days. On the contrary, during artificial disasters or terrorist incidents, the index drops only on the day of the event and the next day, so investors should short sell the index on the day of the disaster and hold it until the end of the first working day following the incident.

Keywords

terrorism; natural disasters; artificial disasters; capital markets

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