Ruhr Economic Papers

Ruhr Economic Papers #296

Financial Uncertainty in Germany and its Impact on Western European Terrorism

by Mario Jovanovic

RUB, 12/2011, 16 S./p., 8 Euro, ISBN 978-3-86788-341-2

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Abstract

This paper analyses the link between the VDAX as a proxy for European financial uncertainty and the number of terror incidents in Western Europe. Considering data of the Global Terrorism Database, the number of terror incidents does – on average – not affect financial uncertainty. In contrast, based on a behavioral model of terrorism motivated by Schmid and de Graaf (1982), lagged financial uncertainty contains information for the risk of terror events. Estimation results of the negative binominal quasi maximum likelihood count data model confirm an inverse impact of lagged financial uncertainty on terrorism. Furthermore, empirical evidence leads to the conclusion of average lead time for terror incidents of 6 month. These results are potentially important for terror prevention.

JEL-Classification: C25, G02, Z10

Keywords: VDAX; terror events; forecasting; count data

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