Impact of Terror Attacks on Indian Stock Prices


By

Poonam
Sr. Program Coordinator
All India Professional & Management Association
 


Abstract:

Stock market is considered as the most efficient in allocating scarce capital to its highest value users. However stock market is more volatile than any other market. Volatility is considered as a very important indicator of stock market development because volatility affects investment, corporate financing and financial stability in the economy.

Fluctuations in the stock prices are due to change in investor's attitude, perception, information (Rumors), economic conditions, political instability, corporate decisions.  This paper tests the impact of various terror attacks on the prices of the share of particular industry. Terror attacks have its impact on the psychology of investors, consumption power, political environment, economic wealth. These attacks sometimes hinder the relations and deals from foreign investors affecting the stock market.

Introduction

Terrorism has given up as global threat and terrorists have free flow of information, communication, Information Technology and so forth. Threats from terrorist groups have grown alarmingly and pose a greater challenge to nations. Terrorists conduct their activities with the aim of destruction. The fear of terrorism is looming large in our daily life. There are innumerable incidents of such fear and insecurity.

Terrorists attacks has its impact globally –be it tourism, Gross domestic product, medical industry, productivity, aviation industry, stock market etc. Terrorism creates feeling of hatredness, frustration and panic in the society with the main objective of destruction in the opposition. Paradigm of Terrorism has seen a major change with terrorists remaining invisible and exhibiting cross nation spread using Internet as a main source of communication.

The need of an hour is to fight against terrorism. It cannot be wiped out by few hands or by force of arms. It has to be combated by combination of government governance, stringent laws, quick and firm system of justice that delivers harsh punishments to the victims. National strategy needs to spell out the threat and how It should be dealt at all levels.

The attacks also changed the way we think about terrorism and moved the topic to the front burner of academic and public attention. Various studies have been done to measure the magnitude of the effect of an unanticipated event My study examines the affect of one of the unanticipated event i.e. attack in Mumbai on November 26, 2008 on the Indian Stock market.

Various studies have been done before to measure the impact of unanticipated event on the financial market.

(1) Impact of September 11 attacks on US and Indian Stock market which concluded that

a) There was huge Impact of Terror attack on WTE on various Industries.
b) There has been an Initial downslide in both American and Indian markets after the event.

(2) Terrorism and stock market which concluded that-

a) Human Capital loss such as kidnappings of Co. Executives has larger impact on Stock Prices rather than Bombings on buildings.
b) There is need of Terrorism Risk Insurance.

The study has been done to look upon that whether volatility in the stock prices is due to the terror attacks on Mumbai.

History of Terrorism:

The word "Terrorism" has been derived from Latin word "Terrere" which means "To fight". This word was first used in Rome in a state of emergency in response to the approach of Warriors of the Cimbri tribe in 105B.C. Terror is used as a means of coercion. In simple words, Terror means all those acts which are done in order to create fear in the minds of the people.

Word "Terrorism" in modern times refers to the killing of innocent people by a private group in a way to create feeling of hatredness and panic among the common people of the nation. It is a word with negative connotations applied to one's enemies which are preferred to be ignored. "Terrorism" creates physical and psychological destruction. Common crowded places are the targets of these mindless brutalities- their ability to strike anywhere and at any time. Year-to – year changes in the gross number of attacks across the globe tells about the effectiveness of preventing these incidents and hence reducing the capacity of terrorists to advance their agenda through violence against the innocent.

Changing Face of Terrorism:

Terrorists groups are also equipped with latest technologies which are used by them for the attacks. If we take the example of attack on "TWIN TOWERS" we can recall that aero planes were used by the terrorist group. No one could even imagine that such techniques would been ever used in so powerful country like USA.

Taking another example of attack in MUMBAI on 26th November ships, Global Position Service data and wireless satellites were used for the attack on the luxurious hotels. Even the materials like Guns, Rifles, explosive material used were of the latest technology.

Recently came in NEWS that Osama Bin Laden followers have prepared capsules which contains poison so as to kill the Americans.
(elaborate that latest technologies are being used in the terror attacks)

Impact of Terrorism on Global Economy:

If we talk about the impact of Terrorism on the global economy, we all can recall how the attack on "TWIN TOWERS" affected not only the US economy but the economies of various other nations. Terror attacks from one country on the another country leads to the feelings of hatredness, revenge etc. leaving its impact on the business and relationships between the two nations. These attacks not only declines the economic growth of the nation which has been attacked rather the countries associated with it also.

US market is the hub of business for various nations like India, China etc. We saw how the attacks on "TWIN TOWERS" slowed down the business of theses nations as most of the business of these nations comes from US market. Economic impact includes cost of property, immediate affect on productivity, Gross domestic product, defense, security spending human cost etc. which is uncountable. The impact can also be observed on the financial markets globally.

We can recall how the attack on "TWIN TOWERS" increased the cost of Information Technology sector as almost whole of the data was lost. It took 10-15 days to recover that data slowing down the business all round the world.

The terror attacks also has impact on global supply chains as it becomes costly in terms of time and formalities at ports and land borders. t also increases the cost of nation attacked in form of security cost, political destabilization, public outrage and radicalization among their population.

Impact of Terrorism on Indian Economy:

A terror attack on India is not a new story. India has been continuously attacked in last year(2008).To count a few –cannaught Place(Delhi), Mehrauli(Gurgaon) , Gaffar market(Karol Bagh, Delhi), Varanasi (Uttar Pradesh). The places chosen by the attackers were the most crowded places so as to kill the maximum people and create panic in the society. But Mumbai attack on November 26,2008 has shocked the Indian economy. Attack on five star hotels-Taj, Oberoi and Nariman House has raised a Question of security for the elite visitors. The impact of Mumbai attack although will not a long term but definitely will affect short term business of the country. These attacks has left its footprints especially on three industries-tourism, hospitality and medical. It has also increased the cost of security especially on land and sea borders. Big and reputed Companies of India has also demanding for "Z" security. Not only these Companies rather say the citizens now are also seeking for "Z"security from the government. Tourism sector has come to stake- be it International or domestic. Clients have cancelled their tours by 25-35% because of security reasons which has directly hit the Aviation and Hotel industry.

These attacks will affect India not only domestically rather globally as most of its business comes from outside India. The target attack on foreigners will have a incalculable impact on Investment climate as well affecting the financial market of India.

Impact of Terrorism on Tourism Industry in India:

Viewing India has "Incredible India" now looks for its gleam. Terror attacks continuously in last year (2008) have come as a whammy for India's Tourism and Hospitality industry.

We can see now that the most famous tourists places in India are having lonely roads with very few tourists all round .Goa Tourism has lost almost half of its tourists. If we talk in figures-we can compare that there were 25 lacs tourists(2007-08) whereas only 11 lacs (2008-09) submitted a report by Hoteliers and Tour operators. Goa attracted large crowds despite repeated security threats and warning of Bali like Bombings. But this time, situation is worst.

If we step into the high tourist season in India(Nov-March) there was already a dip of 15% because of US recession but IATO (Indian Association of Tour operators) released a news that there will be another dip of 10% because of the terror attacks. Travel advisories have put a warning of a high terrorist threat throughout India and especially the attacks on the luxurious hotels have added to the negative impact .Hotel Industry is viewing 18% dip in revenue .Hospitality industry has been hit harder with a dip of 40% in Business since the attacks. Even the domestic tourism has slowed down .Smaller cities like Chandigarh and Punjab are confronting 20-30% cancellations.

Even the aviation industry are in for a rough ride ahead with cancellations of trips by overseas visitors. Tourism industry brought 12000 crores to the government but this year it is expected to be a drop of 20 to 25% .Drop in the tourists will take away a good chunk of seasonal income .Situation is grim for the industries mentioned above which will have its impact on gross domestic product of our country. Unfortunately, India does not have politicians like Rudy Giuliani, Spunky Mayor of New York who rallied the city after an attack on "TWIN TOWERS".

Terrorism and Stock Market:

It has viewed that financial markets are directly or indirectly the victims of Terrorist attacks .It has been found that attacks in countries which are wealthier and more democratic are associated with larger negative share price reactions. Also, human capital loss such as kidnappings of company executives are associated with larger negative stock reactions than physical loss such as bombings on buildings.  One reason that the country expects to observe a reaction in the stock price of affected firm is because investors considers tangible and intangible losses as well as increased cost of doing business in new terrorism aware environment. It also leads to a decision such as when to reopen the market taking into consideration the factors like safety of personnel returning to work and viability of infrastructure and communication in systems. If we take the example of terror attacks of 9/11, it undermined the stability of the US and international financial system. The aftermath of the attacks was that financial markets were not only confronted with, major activity disruptions caused by massive damage to property and communication systems but also with soaring levels of uncertainty and market volatility .Impact of terror attack is visible on the stocks of various industries of the country which has been attacked. Also, the investors confidence level is deteriorated beyond the national boundaries because of contagion effects.

It can be concluded that when the return deviation is large and statically significant, the market saw the events as important.

Impact of Terror attack  in Mumbai and Stock Prices:

This year has been the worst time for India's financial hub. Analysts feel that the fear will continue to overshadow events for the long time. There would be incalculable impact on investors climates, tourism and hospitality industries. The stock markets bellwether Index, Sensex almost down after a day, a big terror incident in the country took place. Due to attack, financial capital of India has been hit by 4000 crores.

Market reopened for trading on Nov 27, and Sensex opened at 1.5% or 137 points down before regaining some of its customary defiance to terror and close 0.7%higher. Overseas investors have pulled out a record $13.5 Billions from Indian Stocks in 2008 as of November 25 causing Benchmark BSE sensitive Index, to slump 56%.Taj Mahal Hotel saw a sharp dip of nearly 17% in share price to Rs. 40.20 marking a new 52 week low. Decline was accompanied by an abnormal rise in volumes. East India Hotels, after opening weakly, share price dipped to a low of Rs.83 before recovery to close at Rs. 97.75. Volumes in share did not show any abnormal variation on BSE. Jet Airways was down as Rs. 129 against earlier closing of Rs. 138. Kingfisher airlines came down to Rs. 27.50.

Particularly 55% drop Indian equity Indexes, major mutual fund managers like Mark Mobius of Templeton Asset management and Devan Kaloo of Aberdeen Asset Managers have been insisting that India democratic traditions are strong enough to withstand terrorism. Periodic acts of terrorism will have a limited and temporary impact on Indian corporate spectrum. There is  only temporary impact on Business confidence.

It can be conclude that because of globalization, the whole world is shrinking and India is still going to be an important player in global economy.

Conclusion:

Unanticipated events like Terror attacks alone do not impact the stock prices of the securities.

References:

Source of Data:

Newspapers: Economic Times

Magazines: India Today, Business World, Business India

ICFAI Books : Global cooperation in combating Terrorism.

Websites: Yahoofinance.com, nseindia.com, economictimes.com, Indiatoday.com, Indianmba.com, Indiantoday.com, indiatoday.in/war
 


Poonam
Sr. Program Coordinator
All India Professional & Management Association
 

Source: E-mail December 19, 2009

          

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