Armed conflict and financial and economic risk: evidence from Colombia

This paper analyzes the impact of armed conflict on financial and economic risk in Colombia using data from 2002 to the end of 2012. We have examined the abnormal returns (AR) in the stock market in response to large-scale terrorist attacks. Our results suggest that the AR in stock market do respond to the attacks; our estimation findings show that these attacks increase the volatility of these AR. The increase in volatility is, however, rather small and short-lived. In addition to the financial risk, we have analyzed the impact of armed conflict on economic risk using the movements in industrial production. We showed the negative impact of armed conflict on the real sector with a five-month lag. We have also performed robustness checks one of which examined the attacks perpetuated only in the capital of Colombia, Bogota. The results suggest that investors do respond to a small subset of attacks executed in the capital city. We discuss the implications of the findings for risk management.