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The Economic Costs of Con�ict:A Case Study of the Basque Country
Program Evaluation
ALBERTO ABADIE AND JAVIER GARDEAZABAL
Andrés Castañeda
October 2009
Universidad del Rosario (Institute) Program Evaluation Presentation October 2009 1 / 17
One Slide Presentation
Motivation
Universidad del Rosario (Institute) Program Evaluation Presentation October 2009 2 / 17
Motivation
Investigate the economics e¤ects of con�ict in the Basque Country
Use synthetic control groups
Use ETA�s truce as a Natural Experiment
Universidad del Rosario (Institute) Program Evaluation Presentation October 2009 3 / 17
Basque Country Background
ETA (Basque Homeland and Freedom, "Euskadi Ta Askatasuna"),founded in 1959
ETA�s terrorist strong activity begun in 1973 until the end of the1980�s.
After the end of the 1980�s the kept attacking but not as bad asbefore.
In September 1998, ETA declared the longest cease-�re
Universidad del Rosario (Institute) Program Evaluation Presentation October 2009 4 / 17
MothodologySynthetic Control Group.
For the synthetic group they use the same methodology than thetobacco case
The variable of interes is the per capita GDP
The percapita GDP of the Synthetic Basque Country will beY �1 = Y0W
�
Universidad del Rosario (Institute) Program Evaluation Presentation October 2009 5 / 17
MothodologySynthetic Control Group.
For the synthetic group they use the same methodology than thetobacco case
The variable of interes is the per capita GDP
The percapita GDP of the Synthetic Basque Country will beY �1 = Y0W
�
Universidad del Rosario (Institute) Program Evaluation Presentation October 2009 5 / 17
Data and Sample
Panel data for the period 1960-1998
The beginning of terrorist period is in 1975
Synthetic Basque country is meant to reproduce the level of GDPthat the real Basque Country would�ve had without ETA�s attacks
Discarding all the regions but Catalonia and Madrid. (0.8508 and0.1492)
Universidad del Rosario (Institute) Program Evaluation Presentation October 2009 6 / 17
Pre-Terrorism Characteristic
Universidad del Rosario (Institute) Program Evaluation Presentation October 2009 7 / 17
Per capita GDP for the Basque Country and it�s Synthetic
Universidad del Rosario (Institute) Program Evaluation Presentation October 2009 8 / 17
)
Y1 � Y �1
Universidad del Rosario (Institute) Program Evaluation Presentation October 2009 9 / 17
PLacebo StudyPer Capita GDP for Catalonia
Universidad del Rosario (Institute) Program Evaluation Presentation October 2009 10 / 17
Discussion
What if Basque Terrorism have imposed a negative reputation andforeing investment have chosen alternatives destinations?
What if the con�ict a¤ected the regions which form the syntheticcontrol?
What if the GDP gap was caused by the higher industrialconcentration before the terrorism and the industrial decline after?
Universidad del Rosario (Institute) Program Evaluation Presentation October 2009 11 / 17
Discussion
What if Basque Terrorism have imposed a negative reputation andforeing investment have chosen alternatives destinations?
What if the con�ict a¤ected the regions which form the syntheticcontrol?
What if the GDP gap was caused by the higher industrialconcentration before the terrorism and the industrial decline after?
Universidad del Rosario (Institute) Program Evaluation Presentation October 2009 11 / 17
Discussion
What if Basque Terrorism have imposed a negative reputation andforeing investment have chosen alternatives destinations?
What if the con�ict a¤ected the regions which form the syntheticcontrol?
What if the GDP gap was caused by the higher industrialconcentration before the terrorism and the industrial decline after?
Universidad del Rosario (Institute) Program Evaluation Presentation October 2009 11 / 17
ETA�s truce as a Natural Experiment 1998-1999
If �nancial markets are e¢ cient, asset prices should re�ect allavailable information and only react to the new information
So, if negative con�ict has a negative impact on the Basqueeconomy....
If truce is credible and true ) terrorist con�ict # ) Basque economy" ) Basque/non-Basque stocks performance "If truce is credible and false ) terrorist con�ict " ) Basque economy# ) Basque stocks/non-Basque performance #
The method of event study is implemented to answer those hypothesis
Universidad del Rosario (Institute) Program Evaluation Presentation October 2009 12 / 17
ETA�s truce as a Natural Experiment 1998-1999
If �nancial markets are e¢ cient, asset prices should re�ect allavailable information and only react to the new information
So, if negative con�ict has a negative impact on the Basqueeconomy....
If truce is credible and true ) terrorist con�ict # ) Basque economy" ) Basque/non-Basque stocks performance "If truce is credible and false ) terrorist con�ict " ) Basque economy# ) Basque stocks/non-Basque performance #
The method of event study is implemented to answer those hypothesis
Universidad del Rosario (Institute) Program Evaluation Presentation October 2009 12 / 17
ETA�s truce as a Natural Experiment 1998-1999
If �nancial markets are e¢ cient, asset prices should re�ect allavailable information and only react to the new information
So, if negative con�ict has a negative impact on the Basqueeconomy....
If truce is credible and true ) terrorist con�ict # ) Basque economy" ) Basque/non-Basque stocks performance "
If truce is credible and false ) terrorist con�ict " ) Basque economy# ) Basque stocks/non-Basque performance #
The method of event study is implemented to answer those hypothesis
Universidad del Rosario (Institute) Program Evaluation Presentation October 2009 12 / 17
ETA�s truce as a Natural Experiment 1998-1999
If �nancial markets are e¢ cient, asset prices should re�ect allavailable information and only react to the new information
So, if negative con�ict has a negative impact on the Basqueeconomy....
If truce is credible and true ) terrorist con�ict # ) Basque economy" ) Basque/non-Basque stocks performance "If truce is credible and false ) terrorist con�ict " ) Basque economy# ) Basque stocks/non-Basque performance #
The method of event study is implemented to answer those hypothesis
Universidad del Rosario (Institute) Program Evaluation Presentation October 2009 12 / 17
ETA�s truce as a Natural Experiment 1998-1999
If �nancial markets are e¢ cient, asset prices should re�ect allavailable information and only react to the new information
So, if negative con�ict has a negative impact on the Basqueeconomy....
If truce is credible and true ) terrorist con�ict # ) Basque economy" ) Basque/non-Basque stocks performance "If truce is credible and false ) terrorist con�ict " ) Basque economy# ) Basque stocks/non-Basque performance #
The method of event study is implemented to answer those hypothesis
Universidad del Rosario (Institute) Program Evaluation Presentation October 2009 12 / 17
Natural experimentProcedure
They asked a group of market analysts
Divide Stocks into Basque stocks and non-Basque stocks
Daily data from 1998 to 2000
Create two Porta�ios: Basque and non-Basque
Estimate and evaluate during short event windows using Fama-FrenchThree Factor Model
Universidad del Rosario (Institute) Program Evaluation Presentation October 2009 13 / 17
Natural experimentProcedure
They asked a group of market analysts
Divide Stocks into Basque stocks and non-Basque stocks
Daily data from 1998 to 2000
Create two Porta�ios: Basque and non-Basque
Estimate and evaluate during short event windows using Fama-FrenchThree Factor Model
Universidad del Rosario (Institute) Program Evaluation Presentation October 2009 13 / 17
Natural experimentProcedure
They asked a group of market analysts
Divide Stocks into Basque stocks and non-Basque stocks
Daily data from 1998 to 2000
Create two Porta�ios: Basque and non-Basque
Estimate and evaluate during short event windows using Fama-FrenchThree Factor Model
Universidad del Rosario (Institute) Program Evaluation Presentation October 2009 13 / 17
Natural experimentProcedure
They asked a group of market analysts
Divide Stocks into Basque stocks and non-Basque stocks
Daily data from 1998 to 2000
Create two Porta�ios: Basque and non-Basque
Estimate and evaluate during short event windows using Fama-FrenchThree Factor Model
Universidad del Rosario (Institute) Program Evaluation Presentation October 2009 13 / 17
Natural experimentProcedure
They asked a group of market analysts
Divide Stocks into Basque stocks and non-Basque stocks
Daily data from 1998 to 2000
Create two Porta�ios: Basque and non-Basque
Estimate and evaluate during short event windows using Fama-FrenchThree Factor Model
Universidad del Rosario (Institute) Program Evaluation Presentation October 2009 13 / 17
Fama-French Three Factor ModelFramework
R jt is the excess return over the risk-free rate on a portfolio j .
Rmt is the excess return in the market portfolio
SMBt is the di¤erence between the returns of portfolios composed bysmall and big size stocks
HMLt is the di¤erence between the returns of portfolios composed byhigh and low book-to-market stocks
AR jt is a zero mean abnormal portfolio return not explained bycommon risk factors
R jt = αj + βj1Rmt + βj2SMBt + βj3HMLt + AR
jt (1)
Universidad del Rosario (Institute) Program Evaluation Presentation October 2009 14 / 17
Fama-French Three Factor ModelAnalysing Returns
Abnormal returns of both portfolio are suited for comparison
They calculated comulative abnormal returns from the day afterannouncement of the truce
CAR jt =�
Πts=1
n1+ AR jt
o�� 1 (2)
Universidad del Rosario (Institute) Program Evaluation Presentation October 2009 15 / 17
Fama-French Three Factor ModelAnalysing Returns
Abnormal returns of both portfolio are suited for comparison
They calculated comulative abnormal returns from the day afterannouncement of the truce
CAR jt =�
Πts=1
n1+ AR jt
o�� 1 (2)
Universidad del Rosario (Institute) Program Evaluation Presentation October 2009 15 / 17
Fama-French Three Factor ModelAnalysing Returns
Abnormal returns of both portfolio are suited for comparison
They calculated comulative abnormal returns from the day afterannouncement of the truce
CAR jt =�
Πts=1
n1+ AR jt
o�� 1 (2)
Universidad del Rosario (Institute) Program Evaluation Presentation October 2009 15 / 17
Cumulative Abnormal Portfolio Returns
Universidad del Rosario (Institute) Program Evaluation Presentation October 2009 16 / 17
Final Remarks
The Study found a 10-percent average gap between Basque percapita GDP and Synthetics per capita GDP in the terrorism period
Changes in the per capita gap are shown to be associated theintensity of terrorist activity
Basque Stocks outperformance non-Basque stocks as the trucebecame credible
At the end of the truce the Basque stocks showed a negativeperformance comparative to non-Basque�s
Universidad del Rosario (Institute) Program Evaluation Presentation October 2009 17 / 17