Terrorist Activities and Financial Market Performance: Evidence from Sri Lanka

Terrorism is frequently indiscriminate in the methods and targets adopted to achieve its objective of sowing fear in a population. The apparently wanton ability of terrorists to strike at a range of targets is an important means of maintaining the perception of a pervasive, unpredictable and existential threat in a population. A key element in this strategy is an affront on an adversary’s economic assets and performance. By directly targeting financial and economic infrastructure, or through the knock-on effects on consumer and investor confidence, terrorists may exert significant pressure to capitulate to their demands. Recent studies (Eldor and Melnick, 2004; Farooq and Ahmed, 2008; Kollias et al., 2010; Kollias et al., 2011) on data from the USA, Israel and elsewhere have demonstrated the broad and destructive effects of terrorism on investors’ confidence with effects on the performance of stock, forex and money markets. The result is a direct affront on a government’s ability to achieve its economic targets and, by diminishing the productive and financial resources available to it, the capacity to defeat the terrorists. Accordingly, a comprehensive analysis of the consequences of terrorist acts, and the effectiveness of terrorist tactics, must include an economic dimension.