Open AccessIMPACT OF POLITICAL INSTABILITY AND TERRORISM ON STOCK RETURNS: EVIDENCE FROM PAKISTAN
Author(s) -
Hasan Raza,
Shafaq Malik
Publication year - 2013
Publication title -
jinnah business review
Language(s) - English
Resource type - Journals
eISSN - 2307-7921
pISSN - 2070-0296
DOI - 10.53369/nbiy1417
Subject(s) - volatility (finance) , autoregressive conditional heteroskedasticity , economics , stock market , terrorism , financial economics , stock (firearms) , speculation , political instability , econometrics , monetary economics , politics , macroeconomics , political science , geography , context (archaeology) , archaeology , law
This study examines the impact of terrorist activities and regime in Pakistan on the return and volatility dynamics of the financial markets in Pakistan between year 2000 and 2010. The study constructs two dummy variables that quantify political instability and terror and examine the effect on stock market volatility. An ARCH and GARCH model to discover evidence that terrorism and regime has a significant impact on both the return and volatility dynamics of stock markets. To capture the asymmetries in terms of negative and positive shocks, this study also uses threshold GARCH (TGARCH) and an exponential GARCH (EGARCH) model. From both of the TGARCH and EGARCH results, it can be reveal that for the return of KSE-100, there are asymmetries in the news that shows bad news has a larger effect on the volatility of return than good news. Finally study of the reaction of the stock market to terrorist events may also provide indication to investors and speculators to adjust their positions when such events transpire.