Economist notes that Markets are resilient against terror attacks.

The Black Swan event is a rare occurance that has massive impact. Terrorist strikes are not a serious “Black Swan” event because they are not tearing down financial markets.

This is part of a pattern that has seen each successive terrorist attack cause smaller and smaller shockwaves in the markets. The September 11th outrage in America had a huge effect; stockmarkets had to close. But share prices eventually recovered, with the help of effective central-bank action. Subsequent attacks, such as the bombings in Madrid, Bali and London, have been one-day market events.

Perhaps this indicates that investors are complacent. Markets might be undermined by what Nassim Taleb, an author, has described as a “black swan”—an event with a small probability of happening, but a big impact if it does. Niall Ferguson, a Scottish historian, pointed out in a lecture on July 2nd to London Business School’s Global Leadership Summit that a previous era of globalisation was brought to a swift end by the first world war. Financial markets were barely anticipating military conflict less than two weeks before its start; just like today, the spread, or excess interest rate, on emerging-market bonds was at historical lows.

True enough, the markets may be overly optimistic.

But might that complacency, in an odd way, be rational? Betting on a black swan does not offer attractive odds. If a catastrophe only happens 1% of the time, then 99 times out of 100, betting on such an event will lose money. The investor will underperform the benchmark and lose clients.

And so normal terrorist attacks do not have much impact on the global market.

They either need to carry out real Black Swan attacks (like nuclear destruction of cities) or create a massive wave of terrorism to take down markets in the more conventional way.

So far, no terrorist does either. This, of course, does not mean they won’t. It just means that the markets have accepted the reality and risk of current terrorism and judged it to be minor.

Advertisements