The Effect of Terrorism on the Number of Trades in a Stock Market: The Case of Turkey

Recent years have witnessed a dramatic increase in the number of terrorist incidents. Such incidents are expected to create a destructive impact on stock markets by lowering returns and raising volatilities. While the literature widely confirms this conjecture, its focus remains narrow in that it considers terrorism’s influence in terms of returns and volatilities, disregarding the underlying factor behind them: aggregate turnover (the number of trades per outstanding share). Motivated by this gap, this study investigates the impact of terror attacks that occurred in Turkey between July 2013 and June 2016 on the Turkish stock market by focusing on aggregate turnover rather than stock returns and volatilities that are determined by turnover, as in the literature. The analysis, which is performed on stocks that were always listed on the benchmark index BIST100 in the specified period, shows that terrorism has a significant positive effect on the turnover in the Turkish market. It suggests that terrorism leads to disagreement among the investors and as a result some sell while others buy their stocks as a response to a terror attack. For gaining a better insight into this result, stocks are divided into two groups as those which trade solely on the Turkish Stock Exchange (single-listed) and the others with depository receipts to facilitate their trade in a foreign market (cross-listed), and the analysis is repeated for each group. It is seen that while terrorism has a significant impact on the turnover of the single-listed stocks, it does not have any significant effect on the cross-listed stocks. Two potential explanations are offered for this result. The single-listed shares are held mainly by Turkish investors, and these investors are known to trade more frequently than their foreign counterparts. Hence, the first explanation is that Turkish investors respond more strongly to a terrorist incident. On the other hand, when two groups of stocks are compared, it is seen that the cross-listed stocks belong to firms with higher capital. Therefore, the second explanation is that investors feel more secure with more prominent firms’ shares, perhaps due to the assumption that such firms’ performance would be more resilient to adverse events such as terrorism.