Terrorism and Stock Market Linkages: An Empirical Study from Pakistan

This paper investigated the impact of prolonged terrorist activities on stock prices of different sectors listed in Karachi Stock Exchange by using newly developed terrorism impact factor index with lingering effect (TIFL) and monthly time series data from 2002(Jan) to 2011(Dec). Johansen and Jeuselius cointegration revealed long run relationship between terrorism and stock price. Normalized cointegration vectors are used to test the effect of terrorism on stock price. Results demonstrated significantly mixed positive and negative impact of prolonged terrorism on stock prices of different sectors and have shown that market has not become insensitive to the prolonged terrorist attacks.