Local Attacks and Industry Portfolios

This section discusses the tests performed on ten industry portfolios following local

and international attacks. In the tables, sets of industry portfolios are sorted starting with the

portfolio showing the largest negative AR or CAR.

Abnormal Returns

Table 4.3 provides a record of country industry portfolio AR following Al Qaeda’s

terrorist attacks in three countries. On the first trading day following the announcement of

local attacks, almost all portfolios display statistically significant negative AR according to

traditional t-tests. Only two British portfolios show neutral or positive reaction to the event.

Indeed, the Health Care portfolio experiences insignificant AR, while the Consumer services

records small yet statistically significant AR.

Table 4.3 Industry Portfolios Abnormal Return following Local Terrorist Attacks

This table contains estimates of 1-day abnormal returns of 10 U.S, Spanish and U.K 10 industry portfolios following the September 11 attack, the Madrid bombing and the London bombing. Abnormal returns are measured over one trading day following the announcement of terrorist event. The Brown and Warner model provides mean adjusted abnormal returns with a level of statistical significance estimated using a parametric t-test and the non-parametric Corrado rank test In the table, industries are sorted in ascending order according to the size of AR.

U.S Indices September 11 Attack Spanish Indices Madrid Bombing U.K Indices London Bombing

Industry AR Industry AR Industry AR

Mean Value -5.29*^ Mean Value -1.54* Mean Value -1.04*

(0.030) (0.018) (0.015)

Consumer Services -11.68*^ Consumer Services -3.08* Consumer Goods -1.83*^

(0.032) (0.019) (0.014)

Basic Materials -8.44*^ Telecom -2.02 Telecom -1.58*

(0.025) (0.013) (0.016)

Technology -6.24* Technology -1.81 Financial -1.54*

(0.055) (0.015) (0.010)

Consumer Goods -5.97*^ Basic Materials -1.67* Industrials -1.46*

(0.024) (0.015) (0.014)

Industrials -5.92*^ Oil -1.54*^ Basic Materials -1.38*

(0.030) (0.012) (0.016)

Financial -4.16*^ Utilities -1.39* Oil -1.14*

(0.020) (0.011) (0.017)

Health Care -3.73*^ Consumer Goods -1.27* Utilities -1.04*

(0.033) (0.013) (0.010)

Oil -2.70* Industrials -1.15* Technology -1.01*

(0.029) (0.016) (0.020)

Telecom -2.29* Financial -1.00* Health Care 0.13

(0.029) (0.014) (0.017)

Utilities -1.78* Health Care -0.48 Consumer Services 0.44*

(0.020) (0.038) (0.017)

*Test statistic is significant at the 0.05 level. ^Corrado test statistic is significant at the 0.10 level. Standards of deviation are in parentheses.

While other industries exhibit negative AR, AR varies across industries and countries. The

U.S industries react most with an overall AR of -5.29 percent following September 11. The

Spanish and the U.K markets are more resilient to their local attacks. They display AR of -

1.54 percent and -1.04 percent respectively. Perhaps, the scale of the September 11 event can

explain the larger U.S AR. Indeed, the attack caused more damage than either the Madrid

attack or the London bombing.

The Consumer services industry is the most sensitive to the attacks across each of

the countries. This industry exhibits the largest negative AR in both the U.S and the Spanish

markets. However, in contrast, the Consumer services industry in the U.K responds positively

to the attack, exhibiting small but positive AR. The Basic Materials, the Telecom and the

Technology industries are the next most responsive industries. For example, the Basic

Materials industry is in the top five of industries by way of the most negative AR, with the

largest negative AR occurring on September 11 (-8.44 percent). Following the Madrid and the

London bombings, this industry recorded AR of -1.38 percent and -1.67 percent respectively.

The Telecom and the Technology industries rank in the top three of the most adversely

affected industries in at least two of the three markets investigated.

Compared to other industries, the Consumer Goods, Industrial, Financial, Oil

and the Utility industries appear to be moderately sensitive to terrorism. They exhibit

statistically significant AR, which are around the average for the sample. Results on the

Health Care portfolios suggest the industry is the least responsive to local terrorist attacks. On

average, this industry portfolio AR is constantly smaller and less significant than of other

industries.

Cumulative Abnormal Returns

Table 4.4 displays industries’ CAR calculated over five trading days following local

terrorist attacks. Comparison of the CAR and the AR indicates whether the equity losses or

profits lasted over time. Results from the U.S and the Spanish markets show consistent and

persistent negative abnormal performance over the week. On both markets, the CAR grew at

twice the size of the AR suggesting that the attacks had a lasting impact. The CAR rankings

of industry portfolio follow the same order as the AR rankings reported on Table 4.3. The

Consumer services, the Basic Materials and the Technology portfolios still bear the largest

losses. In contrast, with the U.S and the Spanish portfolios, the CAR of the British portfolios

do not follow the pattern of the AR. On the U.K market, industries negative CAR are on

average smaller than the negative AR, suggesting that the negative returns generated by the

London Bombing were only temporary. After five days of trading, more than half of the U.K

industry portfolios earn positive CAR.

Table 4.4 Industry Portfolios Cumulative Abnormal Return following Local Terrorist Attacks

This table contains estimates of 5-day cumulative abnormal returns of 10 U.S, Spanish and U.K industry portfolios following the September 11 attack, the Madrid bombing and the London bombing. Cumulative abnormal returns are measured over five trading day following the announcement of terrorist event. The Brown and Warner model provides mean adjusted cumulative abnormal returns with a level of statistical significance estimated using a parametric t-test and the non-parametric Corrado rank test In the table, industries are sorted in ascending order according to the size of CAR.

U.S Indices September 11 Attack Spanish Indices Madrid Bombing U.K Indices London Bombing

Industry CAR Industry CAR Industry CAR

Mean Value -13.56*^ Mean Value -3.98*^ Mean Value 0.04

(0.064) (0.038) (0.039)

Basic Materials -20.62*^ Consumer Services -6.59*^ Oil -1.63

(0.054) (0.043) (0.009)

Consumer Services -19.69*^ Technology -5.35* Utilities -1.26*

(0.070) (0.058) (0.016)

Technology -17.90*^ Utilities -4.76*^ Consumer Goods -1.11*

(0.117) (0.026) (0.032)

Industrials -16.75*^ Telecom -4.66 Consumer Services -0.75

(0.064) (0.026) (0.007)

Consumer Goods -14.56*^ Oil -4.30*^ Health Care 0.21

(0.050) (0.025) (0.030)

Oil -13.95*^ Basic Materials -3.65* Industrials 0.29

(0.064) (0.028) (0.003)

Health Care -11.77*^ Consumer Goods -3.60*^ Financial 0.50

(0.071) (0.028) (0.190)

Financial -10.19*^ Industrials -3.52*^ Technology 0.98

(0.044) (0.038) (0.098)

Utilities -6.34* Financial -3.36*^ Basic Materials 1.15

(0.045) (0.029) (0.007)

Telecom -3.81* Health Care -0.04 Telecom 2.05

(0.060) (0.085) (0.002)

*Test statistic is significant at the 0.05 level. ^Corrado test statistic is significant at the 0.10 level. Standards of deviation are in parentheses.

Overall, the U.S and the Spanish markets appear to react to local terrorist attacks in a

similar manner. Relative to their market, the different U.S and Spanish industries display

comparable level of response local terrorist attacks. The events also appeared to have a lasting

effect on both markets. However, the U.K market does not react in the same manner to its

local terrorist attack. There is evidence that the event did not have a lasting impact on industry

portfolios.