Stock Market Dynamics in Pakistan: What Do Political Events and Budget Announcements Disclose?

Abstract

The purpose of this study is to capture Pakistani stock market dynamics in response to political- and budget events. The study of political events and budget announcements together is quite reasonable in that: swift transformations of governments are likely to change annual budget policies, so both political- and budget events go side by side and influence the stock market performance. Moreover, we want to check: whether budget is one possible channel to offset or somehow reduce the damage occurred due to political instability? We employ event study methodology over the sample period 1998-2016 of KSE-100 index daily returns to test the investor’s reaction to political- and budget news and, investigated whether stock market behaviour is consistent with efficient market hypothesis or over- and under-reaction hypothesis or uncertain information hypothesis. We find evidence that Pakistani stock market exhibits weak form of the EMH for expected political- and budget events. The results of unexpected political events report that investors overreact to good political news while under-react to bad political news, indicate that results are consistent to UIH. The study may suggest that budget policies may not be very useful to offset the negative impact of political instability for a longer time period. So, the developing nations, especially, with more exposure towards political risk may use this suggestion as a strategic tool and, focus on some other channels to compensate the harmful effects of political instability on stock market performance.

Keywords: Pakistan, KSE-100 index, Political events, Budget events, Event Study

JEL Classification: G1, G14, H61