Political Instability and Stock Market: An Event Study

Abstract

Our study examines the response of stock returns with respect to political instability news using time series data from 1996 to 2023. To test efficiency of market or semi-strong efficiency of Pakistan stock market for political instability news, we used most important technique in economics and finance called event study methodology. We select five events on the basis of data availability, events are put into subgroups based on anticipation window, adjustment window and event date window. We performed event study on stock return of the selected political events. To test the above objectives, first we calculate returns than excess return. We used market adjusted model to calculate excess returns and then we calculate cumulative abnormal returns. The results of our empirical analysis shows that there are significantly excess returns which mean that Pakistan stock market is more sensitive to political instability announcements. Present study increase our knowledge about salient role of political risk in growth of stock market, help market regulatory bodies, firms and investors in the implication of rule and policies that mitigate the political uncertainty.