The trade data are obtained from the United Nations database, covering trade flows from 1990 to 2013. Table 1 presents the countries included in the analysis. Gross Domestic Product (GDP) data of selected countries in US dollars is obtained from World Bank's World Development Indicators. US GDP deflator is used to convert nominal GDP to real. Terrorism data i.e., the number of terrorist activities and incidents are derived from Global Terrorism Database (GTD). GTD provides comprehensive information about domestic , transnational and international terrorism. Other gravity variables' data required in the trade model like geographical distance between the two countries, common border, common language, landlocked are acquired from French Research Center in International Economics (CEPII).

Both random and fixed effects models are estimated to investigate the effect of number of terrorism incidents on imports and exports. Fixed-effects (FE) models are utilised to study the impact of variables that vary over time. Exogenous variables such as political system of a country, business practices of a company, business cycles etc are fixed within a country and vary across countries. FE models controle for the effect of factors, fixed over time so that the effect of the exogenious varibales on bilateral trade could be estimated. However, parameters estimated using fixed effect models carry have high standard errors. These models also assume correlation between error term and exogenious variables. These perform well for data having high within-cluster variation or when variables change rappidly over time. Random effects (RE) model on the other hand assumes that unobserved variables are not associated with the exogenious variables. This assumption may be violated, however the model has lower standard errors and also allow estimating effects for time-fixed variables. Hence, this makes RE model more appropaite.

Trade flows are distinguished between developing- (i.e. South-South), developed-(i.e. North-North) and developed and developing (i.e. North-South) countries. Separate models are estimated for each group of countries considering both imports and exports using FE and RE techniques and results are compiled in tables 2 and 3.

Table: 2. Fixed Effect Estimates of the Effects of Terrorism Incidents on Imports and Exports

Variables are statistically significant at *0.1, **0.05 and ***0.001 levels. Figures in parantheses show robust standard errors.

This is an on-going study to estimate the effect of terrorism incidents on trade using gravity model. The study uses annual bilateral trade data come from the United Nations Comtrade database, covering trade flows from 1990 to 2013. The data set consists of 50 countries including six lower income countries, 17 Lower Middle Income countries, 13 Upper-Middle Income countries and 14 High income countries include. Countries are grouped as South-South when developing countries trade with each other, North-North when developed countries trade with each other and North-South when developed and developing countries are trade partners. The analysis shows that all the standard gravity-type variables carry expected sign. Further countries partner in war against terrorism have statistically significantly higher trade than those not partner in the trade. Also, the number of terrorism incidents have negative effected both exports and imports when developing countries trade with developed countries.