Industry Premiums and Systematic Risk under Terror: Empirical Evidence from Pakistan

This study aims to investigate the impact of terrorism on Pakistani industry excess returns and systematic risk. Value weighted monthly returns for non-financial firms listed at Karachi Stock Exchange, from January 2001 to December 2010, are used for this study. A multiplicative term to study the change in systematic risk and a dummy variable to examine the industry wise impact on excess returns was introduced in the standard CAPM framework. Terrorism as a phenomenon, not an event in Pakistan, has a significant negative impact on the excess returns of twelve out of twenty seven industries. The evidence suggests a mixed effect of terrorism on the systematic risk of some industries. Transportation, Tobacco and Automobiles industries appear to be most affected sectors of the economy.