Stock market returns and terrorist violence: evidence from the Basque Country

We analyse the extent of the negative effects of violence in the Basque Country on the financial and economic activity of the region. We use daily data of the Basque stock market index and employ long memory regression models, with the Spanish stock market index and an index for violence employed as weakly exogenous regressors. The results show that violence significantly reduces the stock market returns in the area. On the other hand, the volatility processes are positively correlated with violence, though not statistically significant.