Are stock markets efficient in the face of fear? Evidence from the terrorist attacks in Paris and Brussels

•We analyze the reaction of airline stocks to the recent terrorist attacks in Europe.•The market response to the attacks is in line with the notion of efficient markets.•We find that the attacks had strong negative valuation effects.•However, the effect was significantly smaller following the Brussels strikes.•This implies that markets priced in possible future attacks after the Paris strikes. We analyze the dynamics of airline stock prices surrounding the recent terrorist attacks in Paris and Brussels. We find that the adjustment of stock prices is consistent with the assumption of efficient capital markets. Analyzing 27 of the largest U.S., Canadian, and European airlines, we show that the terrorist attacks in Paris and Brussels had a strong short-term effect on the valuation of airline companies. However, this effect was significantly smaller following the Brussels strikes, despite the apparent direct impact of the bombings of the Brussels airport on the airline industry. Furthermore, we find that smaller, less geographically diversified, airlines are significantly less affected by the attacks than their global peers.