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VIX and Terrorism. Why a coincidence with no causal effects

Stefano Fugazzi (ABC Economics) – Earlier this week we published two interesting researches elaborated by ABC Economics which assessed whether market movers could have possibly anticipated the occurrence of terrorist acts.

To test this hypothesis we selected:

  • Three variables: one “prime” variable (the VIX Index) and two “control” variables (Gold and Brent Oil)
  • An event window of 7 days (day -5 to day +1) covering five trading days prior to the event, the actual event day, and the first subsequent trading day.

Observed events:

  • 13 November 2015: Paris Attacks
  • 7 January 2015: Charlie Hebdo Shootings, Paris
  • 7 July 2005: London Bombings
  • 11 March 2004: Madrid Train Bombing
  • 11 September 2001: World Trade Centre, New York

Understanding the research methods in order to explain the outcomes

We noted that the VIX Index rose in all five instances in the five trading days prior to the terrorist attacks. This outcome is consistent with the Hypothesis.

Did this occur by chance or is there a causal effect / causality?

To verify the hypothesis, and the VIX preliminary results, we tested it against two control variables: Gold and Brent Oil.

We selected Gold and Brent Oil as our control variables because those are two important benchmarks: the former is a safe-haven and the latter is greatly affected by geopolitical events.

Should the their behaviour – likewise VIX’es – have lighted some commonality of patterns, then we would have asserted that there is indeed some possibility that market movers may have been pre-warned. In that case we would have researched the matter further to assess the strength or weakness of this possibility.

However, as far as pricing is concerned, our analysis did not highlight anything unusual over the selected time-horizon. Therefore, on that basis we conclude that the VIX Index rose by chance and no causal effects were found.


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