New York City: Terror attack of
11 September 2001 — Impact on the
capital markets

Considering the impact of the events of 11 September 2001 on the capital markets shows that both shares and bonds fluctuated wildly in the short term following the attack of 11 September. It is also clear, however, that the medium- and long-term effects on stock markets were less serious than is often assumed. Whereas the stock markets had lost between 10% and 15% in the six months prior (!) to the terrorist attacks, six months later both the local and global indices were approximately 7% higher than they had been on the evening before the disaster. Even the index of insurance company shares was higher than on 10 September.

However, index levels alone do not adequately express the consequences for investors. Thus, for example, the uncertainty of players on the stock markets rose appreciably following 11 September, as the increased volatility — a measure of price fluctuations on the stock market — clearly shows.

Share prices are influenced by numerous, interrelated factors. The effects of a single event could therefore never be separated out beyond reasonable doubt based on historical data. The theory that 11 September caused the massive fall in share prices in the following year is therefore not tenable either. By then, the disaster already lay more than six months in the past, and its economic effects were largely measurable. It must therefore be assumed that, by this time, share prices had already made due allowance for the disaster. The interim conclusion was therefore that, contrary to popular opinion, the effects of the World Trade Center (WTC) disaster on stock markets were quite short term and moderate.

The situation in the fixed-income markets was different, however. Here, lasting effects were to be seen. Thus, even six months after the disaster, the respective interest rates in the USA and Europe were still 1.5 and one percentage points below what they had been on 10 September. While it is true that both economies were in a prolonged cycle of falling interest rates at the time, there is nevertheless every reason to believe that the event of 11 September intensified this trend. The expansionary monetary policy in particular accelerated the trend whereby yields continued to fall.

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Kobe: Earthquake of 17 January 1995 —
Impact on the capital markets

Whilst, on balance, there was no evidence of any medium- and long-term effects on world stock markets as a result of the Kobe earthquake, the Japanese stock market lost a further 10% of its value over subsequent months. However, mirroring the Japanese economy, the market was in a sustained downward trend throughout the 1990s. Any negative effect of the disaster beyond the loss of the first few days is therefore questionable.

Around 2.5 months after the earthquake, interest rates on the Japanese bond market fell by around one percentage point, whereas the international bond markets were unaffected. However, the timing of this development also fits in with a longer-term trend, giving rise to the suspicion that the disaster merely intensified the previous trend.

Conclusion: Seen as a whole, although the capital markets' responses to these disasters were different, the trends outlined support the theory that the effects of a disaster in a megacity tend to be relatively short-lived and moderate. It is nevertheless possible to imagine scenarios that would most probably have a marked effect on capital markets. This would be especially true of economies that generate a large part of their growth in a megacity. These effects would generally tend to be confined to the region in question, however.

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