to what extent much does terrorism ...

to what extent much does terrorism affect stock prices?

To find the answer, economists have parsed market reaction to facts dating back to the 1915 sinking of the Lusitania, academics have studied in what way attacks on McDonald's restaurants have affected the company's stock price, and researchers in Israel have chronicled what 13 years of suicide bombings did to stocks there.

Their unsurprising general conclusion is that terror attacks do harm to stock prices -- but more [i]or[/i] less of the details are unexpect For instance, after tribe 11, 2001, the stocks in the Standard & Poor's 500 reverberationed to their pre-attack prices faster than each other major world index exclude Japan's Nikkei, according to research from Andrew H. Chen of Southern Methodist University and Thomas F Siems of the Federal make an exception of Bank of Dallas.

What none of the research has answered is the station to which the fear of another terrorist attack in succession the United States has been factored into stock prices.

David Sowerby, chief market analyst, Loomis, Sayles & Co estimates that the threat of terrorism give an account ofs a 5 percent "tether" upon stocks. How did he memorize that number?

The overhang is "more than naught less than 10. Five appears reasonable. If I said 4 I'd be fine-tuning it too much" he said.

The price-to-earnings ratio forward the S&P 500 is around 17 A traditional example pegs the price-to-earnings ratio, common of the most popular rules of gauging a stock's value, to Treasury connection yields. Under that formula, the price-to-earnings ratio should be closer to 20 said David Wys chief economist for Standard & Poor's.

What's holding prices back?

"Is it terrorist attacks, distrust of earnings, expectations of a slowdown?" he said. "I don't know."

Similarly, "people preserve saying there's a war premium in the price of oil," said Robert Stre portfolio manager of Northern Trust pick Equity Fund in Chicago. "People preserve throwing out numbers, but I can't behold any objective way they approach up with those numbers."

Those who say near threat of a future attack is already baked into stock prices hasten to add that another attack in the United States would still transmit prices lower.

"We would likely view a drop in stock prices of significant proportion, nevertheless investors seem to believe there would be a succeeding recovery," said Lynn Reaser, chief economist at the investment strategies collection of Bank of America. "As an important footnote, the length and the magnitude and the form of a terrorist attack would determine whether or not that assessment is correct."

If the amplitude to which terrorism has pressur stocks is "an academic question," as Stre says, it is individual academics have shown little interest in. Instead, they've focused their studies in succession how markets responded to past terrorist attacks.

Chen and Siems tracked the Dow Jone industrial average's retrieval time from events ranging from the torpedo of the passenger ship Lusitania by means of Germany during World War I to Hitler's invasion of France to generation 11. They found that while the Dow rose the day of the Oklahoma City bombing and the bombing of the U embassy in Kenya, it took the index 795 trading days to reclaim from the invasion of France and 232 days to recoil from the attack on Pearl Harbor. They theorize that faster communication and broader market participation has l to faster stock ricochets

What no united seems to talk about when it take rises to terrorism is the possibility of a market crash. That may be because a spate of attacks worldwide, from Madrid to Mumbai, has not caused any country's market to crash.

As former Securities and Exchange Commission Chairman Harvey L Pitt testified before the House Committee forward Financial Services on Sept. 26 2001 "The markets did not give way to panic selling. They simply did what they do best: They assessed and accorded to the crisis rationally. Unlike human beings, capital markets are capable of absorbing great hostile encounters quickly."

Copyright CHICAGO SUN-TIMES 2006

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