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Fund Times

Fund Times: Global Terror's Impact on Capital Markets

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A study by Merrill Lynch researchers and high-yield strategists Christopher Garman and Oleg Melentyev, while limited in scope, suggests some interesting findings on market reactions to recent terrorist attacks around the globe. Markets, the research suggests, may be more resilient to these disruptions than we might think. The researchers examined market volatility in various different asset classes for time periods of one day, one week, one month, and one quarter after 15 terrorist attacks between 1993 and August 2006. The period begins with the first attack on the World Trade Center in New York City, on Feb. 26, 1993, and ends with the London subway bombings of July 7, 2005, the last major attack prior to the study's publication. The resulting market movements often seem difficult to explain and suggest that, despite the shock that an attack can initially have on a market,  broader-based market forces of supply and demand take over for the long term.

One day after the London bombing of July 7, 2005, the S&P 500 Index gained 1.2%, one week after the event; the index was up 2.4%. Oil prices also fell by 1.8% the next day and 4.8% the next week. These results seem counterintuitive, because one might expect that an attack on one of the world's great financial centers might roil markets. The Oct. 14, 2000, attack on the U.S.S. Cole in Yemen brought a 5.9% drop in oil the next day and a 15.7% drop one quarter later. Because one would likely expect a rise in oil prices with added instability in the region, these percentages suggest some terrorist attacks have either little impact on capital markets or at least the impact is not always obvious. Without a doubt, Sept. 11, 2001, had the greatest impact on various markets, both in terms of disruption and overall volatility. However, even here, the direction the market initially took in response to the attack was reversed within one quarter.

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