Understanding the Impact of Terrorism and Armed Conflicts, Diapositivas de Geopolítica

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N i c o l e B l a n c o

Armed Conflict & Terrorist Attacks

Contents

Introduction

The War Puzle

Stock Market

Reaction to Wars

Terrorism and the

Changing Nature of

Armed Conflictt

Conclusion

Case Study: 9/

Stock Market Reaction to Wars Exhibit 1 shows the wars and invasions that the US military has been directly involved in since 1900 together with the S&P 500 Index. The stock market is shown in logarithmic scale, If any pattern comes close to being recognizable, it might be seen in the two world wars, when the stock market first declined strongly before entering an extended rally. so similar percentage losses and gains lead to similar declines and advances in the chart.

Omar, Wisniewski, and Nolte (2017) examined

international conflicts between 1995 and 2007

and found the CAR of stock markets in the 100

days surrounding the outbreak of war to be

negative, on average. For the S&P 500, they found

an average decline of 3.4%, which was about

equally split between the 50 days before and the

50 days after the outbreak of war. For the MSCI

World Index, they found a similar average decline,

though this decline was more pronounced after

the outbreak of war.

The War Puzle

The rational explanation for the war puzzle does not require investors to handle probabilities. Instead, all you have to assume is two different portfolios—a peace portfolio and a war portfolio—with different risks and returns. This mix of two portfolios increases risk and reduces return, however, so investors remain reluctant to increase their allocations to the war portfolio and the resulting decline in utility.

Explanation 2: A Rational Shift between Portfolios

Terrorism and the Changing Nature of Armed Conflict The UCDP has collected information about all armed conflicts globally since 1946 and categorized them into four major types, as shown in Exhibit : Interstate Conflicts Internal Conflicts Internacionalized Internal Conflicts Extraterritorial Conflicts

The impact of the terrorist attacks was felt in particular by four segments of the US economy: The only US airline that remained profitable throughout 2001 and 2002 was Southwest Airlines, though the company suffered a 53% drop in net income in 2002 from the previous year. Airlines Until the 9/11 terrorist attacks, most insurance contracts covered damages from terrorist attacks. As a result, insured losses of the event amounted to more than $40 billion. Insurers The attacks disrupted or destroyed more than 18,000 small businesses, most of them located near the World Trade Center in New York City. Small businesses Even after the borders reopened, inspections were much tighter than before, leading to longer wait times and higher spoilage. The situation escalated dramatically with the anthrax mail attacks that started in October 2001. Agriculture

Finally, Exhibit 19 shows an inexplicable result: On average, markets that suffered more on the day of the attacks recovered their losses more quickly than markets that suffered less. In fact, US stock markets suffered losses that were in line with the global average but were among the first to recover, even though the US economy and US capital markets were the ones hit by the attacks.

F o r y o u a t t e n t i o n

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