Do terrorist attacks matter for currency excess returns?

This paper provides a novel investigation into how currency excess returns react to terrorist attacks. We construct a terrorism risk factor and demonstrate that it significantly matters to excess returns of both carry trade and individual currencies. Furthermore, we form a currency portfolio by simply buying terrorism-sensitive currencies and selling less terrorism-sensitive currencies, which yields economically positive and statistically significant returns. It has shown that this newly proposed terrorism risk factor could provide a marginal improvement for exchange rate pricing facing terrorist attacks.