ABSTRACT
This paper uses daily data to analyse how Israel’s stock and foreign exchange markets reacted to 639 terror attacks that took place between 1990 and 2003 in which 1,212 people in Israelwere randomly killed and 5,726 peoplewere randomly injured. The data distinguishes acts of terror by location, type of attack, type of target, number of casualties, and the number of attacks per day. Suicide attacks had a permanent effect on both the stock and foreign exchange market, as did the numbers of people injured and killed. Location of a terror attack had no effect on either market. Markets did not become desensitized to terror attacks. Our principal conclusion is that financialmarkets continued to efficiently perform their economic functions. Also, market-liberalization policies were not disrupted; the conclusions about market efficiency suggest that the market liberalization policies contributed to coping with terror. Although based on data on terror against Israel, the results have broader implications for the Western world because of Israel’s democratic regime, its free market, and its well-developed financial markets.
