Risk aversion (psychology)

Microeconomics

Shock (circulatory)

Expected utility hypothesis

Economics

Business

Preference

Systematic risk

Political science

Monetary economics

Internal medicine

Financial economics

Medicine

Bond

Finance

Equity (law)

Terrorism

Mutual fund

Journal of Financial Economics

Using a comprehensive list of terrorist attacks over three decades, we find that aggregate investor risk aversion inversely relates to terrorist activity in the United States. A one standard deviation increase in the number of attacks each month leads to a $75.09 million drop in aggregate flows to equity funds and a $56.81 million increase to government bond funds. Tests on alternative channels further suggest that the shift in aggregate risk aversion is driven mainly by an emotional shock rather than changes in wealth or the outside environment. We also investigate possible alternate explanations for reduced flows to risky assets. Our evidence is consistent with a fear-induced increase in aggregate risk aversion.

Terrorist attacks and investor risk preference: Evidence from mutual fund flows