Electoral Violence and Securities Market Responses During the 2013 Pakistan General Election: Political Risk Metrics for the Rest of Us

Abstract

The efficient-market hypothesis holds that securities markets are efficient, fair and instantaneous in their treatment of material information flows. The reality may be somewhat messier in the emerging traded asset markets of the Global South. Emerging markets, notably Pakistan, present particularly esoteric market information systems. In general, stock and corporate bond market actors gauge future corporate profits and sell assets when negative news announcements threaten future earnings. For their part, sovereign bonds sell off when the overall economic conditions of the national issuer appear to be threatened. Together, stock and bond markets amount to a massive crowd-sourcing mechanism for assessing and acting on political risk. Both academicians and policy practitioners have yet to fully appreciate the risk-assessment function played by markets. This paper will assess financial market responses to reports of electoral violence during the important 2013 general election in Pakistan. The election is used herein as an event study to assess how stock and bond traders responded to confirmed acts of political violence during and just after the campaign. Insights into both the theoretical efficacy of the efficient-market construct, as well as the particularities of Pakistan at this point in its long democratic journey, will be assessed.

Keywords: Eurobonds, Equities, Pakistan, Violence, Elections

JEL Classification: E44, F30, G12, G15, G16, P16