An empirical analysis of terrorism and stock market spillovers: The case of Spain.
This article assesses spillover effects between terrorist activity and Spanish stock market returns for the period 1993-2017 using the recent methodology proposed by Diebold and Yilmaz (2012). We construct a daily Terror index that reflects terrorist activity of different types of perpetrators: domestic terrorism (ETA) and the international terrorism linked to Islamic extremism. Our static analysis shows that connectedness is important, as it explains about half of the forecast error variance; most of it attributed to shocks from terrorist events on stock market return forecasts. Our dynamic analysis also uncovers an increase in spillover effects between the early period characterized by ETA terrorist attacks to the recent past characterized by Islamic terrorist attacks.