The Cross-Border Financial Impact of Violence
Author: Mohamad M. Al-Ississ, Former Research Fellow 2008-2009, The Dubai Initiative
Belfer Center Programs or Projects: Dubai Initiative
This paper argues that violent events have two economic effects: a direct loss from the destruction of physical and human capital, and a reallocation of financial and economic resources. It documents the positive cross-border impact that follows violent events as a result of this reallocation. Thus, it reconciles the two existing perspectives in the literature on whether violence has a small or large economic effect. Our results show that, in globally integrated markets, the substitution of financial and economic activities away from afflicted countries magnifies their losses. This study evaluates certain factors affecting the impact of violence in non-event countries. Geographic distance from the event country is not monotonic in its effect on the valuation of equities of other countries. Also, the safer a non-event country is perceived to be relative to the event country, the greater the positive impact on its financial market. Finally, event countries with deeper financial markets are less susceptible to capital reallocation following an event.
- Al-Ississ Working Paper (2.4 MB PDF)
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