Impact of Political Uncertainty on Pakistan Stock Exchange: An Event Study Approach

  • Fiaz Ahmad SULEHRI Lahore School of Accountancy and Finance University of Lahore, Pakistan
  • Amjad ALI Lahore School of Accountancy and Finance University of Lahore, Pakistan University Paris 1 Pantheon Sorbonne, France European School of Administration and Management (ESAM), France

Abstract

Pakistan is struggling against many problems; out of which political instability and terrorism are crucial problems. These issues hindered the economic growth of the country as well as the confidence of investors. This study has investigated the impact of political events on Pakistan Stock Exchange.


This paper uses a standard event study methodology. Data relating to the stock market index has been collected from the website of Pakistan Stock Exchange and relating to political events has been collected from the newspapers of Business Recorder and DAWN. A total of 18 political events was considered in the study out of which 08 events were coded as positive and other 10 were deemed negative. The first day abnormal return, a five-day cumulative abnormal return and ten-day cumulative return was calculated for all of the events. This study found evidence that political events affected the stock market in Pakistan, but their impact is different considering the economic and political implications of these events. Certain events had the strongest impact on the stock market like Nuclear tests for effective defense, the Supreme Court had revoked the Presidential order and Nawaz Sharif had been reinstated, General elections held in the country and the 14th amendment because 14th amendment was related to the elimination of corruption in political parties. Overall, this study laid the foundation to make further explorations into the phenomenon of uncertainty caused by political events in relevance to the stock market in Pakistan.

References

[1] Abadie, A., Gardeazabal, J. 2008. Terrorism and the world economy. European Economic Review, 52(1): 1-27. https://doi.org/10.1016/j.euroecorev.2007.08.005
[2] Abdelrehim, N., Maltby, J., Toms, S. 2011. Corporate social responsibility and corporate control: The Anglo-Iranian oil company, 1933–1951. Enterprise and Society, 12(04): 824-862. https://www.jstor.org/stable/23701572
[3] Aggarwal, R.K., Meschke, F., Wang, T. 2012. Corporate political contributions: Investments or agency. Business and Politics. http://dx.doi.org/10.2139/ssrn.972670
[4] Agirman, E., Ozcan, M., Yilmaz, O. 2014. The impact of terrorism on financial markets: an empirical study. Journal of BRSA Banking and Financial Markets, 8(2): 99-117. https://ideas.repec.org/a/bdd/journl/v8y2014i2p99-117.html
[5] Ajinkya, B.B., Jain, P.C. 1989. The behavior of daily stock market trading volume. Journal of Accounting and Economics, 11(4): 331-359. https://doi.org/10.1016/0165-4101(89)90018-9
[6] Aktas, H., Oncu, S. 2006. The stock market reaction to extreme events: the evidence from Turkey. International Research Journal of Finance and Economics, 6(6): 78-85. http://www.eurojournals.com/finance.htm
[7] Alesina, A., Perotti, R. 1996. Income distribution, political instability, and investment. European Economic Review, 40(6): 1203-1228. https://doi.org/10.1016/0014-2921(95)00030-5
[8] Alesina, A., Özler, S., Roubini, N., Swagel, P. 1996. Political instability and economic growth. Journal of Economic Growth, 1(2): 189-211. https://link.springer.com/article/10.1007/BF00138862
[9] Ali, A., Bibi, C. 2020. Public Policies, Socio-economic environment and crimes in Pakistan: A time series analysis. Bulletin of Business and Economics, 9(1): 1-11. https://mpra.ub.uni-muenchen.de/100216/
[10] Ali, A., Şenturk, İ. 2019. Justifying the impact of economic deprivation, maternal status and health infrastructure on under-five child mortality in Pakistan: An empirical analysis. Bulletin of Business and Economics (BBE), 8(3): 140-154. https://mpra.ub.uni-muenchen.de/96055/
[11] Ali, A. 2011. Disaggregated import demand functions of Pakistan. An empirical Analysis. M-Phil Thesis, NCBA & E, Lahore, Pakistan, 1-70. https://scholar.google.com.pk/citations?user=L65fhAsAAAAJ&hl=th
[12] Ali, A. 2015. The impact of macroeconomic instability on social progress: an empirical analysis of Pakistan. Doctoral dissertation, National College of Business Administration & Economics Lahore. http://eprints.hec.gov.pk/6793/
[13] Ali, A. 2018. Issue of income inequality under the perceptive of macroeconomic instability: An empirical analysis of Pakistan. Pakistan Economic and Social Review, 56(1): 121-155. https://mpra.ub.uni-muenchen.de/74963/
[14] Ali, A. Bibi, C. 2017. Determinants of social progress and its scenarios under the role of macroeconomic instability: empirics from Pakistan. Pakistan Economic and Social Review, 55(2): 505-540. https://mpra.ub.uni-muenchen.de/72920/
[15] Ali, A., Ahmad, K. 2014. The Impact of socio-economic factors on life expectancy in sultanate of Oman: an empirical analysis. Middle-East Journal of Scientific Research, 22(2): 218-224. https://mpra.ub.uni-muenchen.de/70871/
[16] Ali, A., Audi, M. 2016. The impact of income inequality, environmental degradation and globalization on life expectancy in Pakistan: an empirical analysis. International Journal of Economics and Empirical Research, 4 (4): 182-193. https://mpra.ub.uni-muenchen.de/71112/
[17] Ali, A., Audi, M. 2018. Macroeconomic environment and taxes revenues in Pakistan: an application of ARDL approach. Bulletin of Business and Economics (BBE), 7(1): 30-39. https://mpra.ub.uni-muenchen.de/88916/
[18] Ali, A., Rehman, H.U. 2015. Macroeconomic instability and its impact on gross domestic product: an empirical analysis of Pakistan. Pakistan Economic and Social Review, 53(2): 285. https://www.jstor.org/stable/26153261
[19] Ali, A., Zulfiqar, K. 2018. An assessment of association between natural resources agglomeration and unemployment in Pakistan. Pakistan Vision, 19(1): 110-126. https://mpra.ub.uni-muenchen.de/89022/
[20] Ali, A., Ahmed, F., Rahman, F.U. 2016. Impact of Government borrowing on financial development (a case study of Pakistan). Bulletin of Business and Economics (BBE), 5(3): 135-143. https://mpra.ub.uni-muenchen.de/78100/
[21] Ali, A., Rehman, H.U. 2015. Macroeconomic instability and its impact on gross domestic product: An empirical analysis of Pakistan. Pakistan Economic and Social Review, 53(2): 285. https://www.jstor.org/stable/26153261
[22] Allayannis, G., Mozumdar, A. 2004. The impact of negative cash flow and influential observations on investment–cash flow sensitivity estimates. Journal of Banking & Finance, 28(5): 901-930. https://doi.org/10.1016/S0378-4266(03)00114-6
[23] Alogoskoufis, G. S., Lockwood, B., Philippopoulos, A. 1992. Wage inflation, electoral uncertainty and the exchange rate regime: Theory and UK evidence. The Economic Journal, 102(415): 1370-1394. https://doi.org/10.2307/2234795
[24] Alti, A. 2003. How sensitive is investment to cash flow when financing is frictionless? The Journal of Finance, 58(2): 707-722. https://doi.org/10.1111/1540-6261.00542
[25] Altug, S.G., Demers, F.S., Demers, M. 2007. Political risk and irreversible investment. CESifo Economic Studies, 53(3): 430-465. https://doi.org/10.1093/cesifo/ifm014
[26] Arin, K.P., Ciferri, D., Spagnolo, N. 2008. The price of terror: The effects of terrorism on stock market returns and volatility. Economics Letters, 101(3): 164-167. https://doi.org/10.1016/j.econlet.2008.07.007
[27] Arzoo, S. 2011. Political instability & its impact on Karachi stock exchange (impact on trading volume and trading value). https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1801231
[28] Ashraf, I., Ali, A. 2018. Socio-economic well-being and women status in Pakistan: an empirical analysis. Bulletin of Business and Economics (BBE), 7(2): 46-58. https://mpra.ub.uni-muenchen.de/88972/
[29] Atanassov, J., Kim, E. 2009. Labor and corporate governance: International evidence from restructuring decisions. The Journal of Finance, 64(1): 341-374. https://doi.org/10.1111/j.1540-6261.2008.01436.x
[30] Bailey, W., and Chung, Y.P. 1995. Exchange rate fluctuations, political risk, and stock returns: some evidence from an emerging market. Journal of Financial and Quantitative Analysis, 30(04): 541-561. https://doi.org/10.2307/2331276
[31] Baker, M., Stein, J.C., Wurgler, J. 2002. When does the market matter? Stock prices and the investment of equity-dependent firms. National Bureau of Economic Research. https://doi.org/10.1162/00335530360698478
[32] Bakke, T.E., Whited, T.M. 2010. Which firms follow the market? An analysis of corporate investment decisions. The Review of Financial Studies, 23(5): 1941-1980. https://doi.org/10.1093/rfs/hhp115
[33] Barro, R.J. 1989. Economic growth in a cross section of countries: National Bureau of Economic Research. https://doi.org/10.2307/2937943
[34] Barro, R.J. 1996. Democracy and growth. Journal of Economic Growth, 1(1): 1-27. https://link.springer.com/ article/10.1007%2FBF00163340
[35] Barry Johnston, R., Nedelescu, O.M. 2006. The impact of terrorism on financial markets. Journal of Financial Crime, 13(1): 7-25. https://www.emerald.com/insight/content/doi/10.1108/13590790610641233/full/html
[36] Bayar, A.H., Smeets, B. 2009. Economic and political determinants of budget deficits in the European Union: A dynamic random coefficient approach. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1340404
[37] Beaulieu, M.C., Cosset, J.C., Essaddam, N. 2006. Political uncertainty and stock market returns: evidence from the 1995 Quebec referendum. Canadian Journal of Economics/Revue Canadienne d' Économique, 39(2): 621-642. https://doi.org/10.1111/j.0008-4085.2006.00363.x
[38] Beaulieu, M.C., Cosset, J.C., Essaddam, N. 2005. The impact of political risk on the volatility of stock returns: The case of Canada. Journal of International Business Studies, 36(6): 701-718. https://link.springer.com/ article/10.1057/palgrave.jibs.8400160
[39] Beck, T., Clarke, G., Groff, A., Keefer, P., Walsh, P. 2001. New tools in comparative political economy: The database of political institutions. The World Bank Economic Review, 15(1): 165-176. https://doi.org/10.1093/wber/15.1.165
[40] Kassem, M., Ali, A., Audi, M. 2019. Unemployment rate, population density and crime rate in Punjab (Pakistan): an empirical analysis. Bulletin of Business and Economics, 8(2): 92-104. https://rfh.org.pk/2019/06/? post_type=paper&magazine_category=bbe
Published
2020-12-23
How to Cite
SULEHRI, Fiaz Ahmad; ALI, Amjad. Impact of Political Uncertainty on Pakistan Stock Exchange: An Event Study Approach. Journal of Advanced Studies in Finance, [S.l.], v. 11, n. 2, p. 194-207, dec. 2020. ISSN 2068-8393. Available at: <https://journals.aserspublishing.eu/jasf/article/view/5767>. Date accessed: 27 apr. 2024. doi: https://doi.org/10.14505//jasf.v11.2(22).10.
Section
Journal of Advanced Studies in Finance