Stock market Reaction to General Election in Pakistan: An Event Study Methodology

Mosab I. Tabash, Musla Valappil, Uzma Iqbal, Umar Farooq and Kai-Yin Woo
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Mosab I. Tabash: College of Business, Al Ain University, Al Ain, United Arab Emirates
Musla Valappil: Department of Commerce &Management Studies, Farook College (Autonomous), Kozhikode, India
Uzma Iqbal: Department of Management Sciences, Pakistan Institute of Development Economics, Islamabad, Pakistan
Umar Farooq: School of Economics and Finance, Xi’an Jiaotong University, P. R. China; Research Fellow, Department of Economics University of Religions and Denominations, Qom, Iran
Kai-Yin Woo: Department of Economics and Finance, Hong Kong Shue Yan University, Hong Kong

Advances in Decision Sciences, 2023, vol. 27, issue 4, 90-113

Abstract: [Objective] This study investigates the impact of the 2018 General Election on stock prices of firms listed on the Pakistan Stock Exchange (PSX). [Methodology] A sample of 34 listed companies selected from PSX and the KSE-100 index were used to investigate the impacts of the 2018 General Elections in Pakistan, on firms listed on the Pakistan Stock Exchange. We adopt the event study for analysis. The research timeline spans 120 days for estimation window, and 21 days for event window with the day after the General Election as the event date. The impact of the national elections is market-related. Hence, unlike the market model used in most of the previous studies, we use the constant mean model to calculate the abnormal returns. In addition to OLS, we apply the t-distributed threshold GARCH model to obtain more efficient parameter estimates in the context of fat tails and asymmetry in conditional variance of errors. [Results] The results of this study indicate a positive impact of the event (2018 General Election in Pakistan) on the sample of listed companies and KSE-100 index. This positive impact can be attributed to the stock market response to the favorable informational content of the general election outcome. The information is fully reflected in the stock market over about 3 days around the event date. Such fast response indicates the existence of semi-strong form of market efficiency in Pakistan stock market. [Implications] The empirical analysis presented in this research not only sheds light on the correlation between political events and stock market performance but also offers valuable insights for formulation of equity investment and portfolio management strategies. This study, therefore, serves as a vital contribution to the existing literature by providing innovative empirical evidence on the intricate relationship between political events, investor sentiment and stock prices in the specific context of Pakistan’s 2018 General Election.

Keywords: Event study; General Election, Pakistan Stock Exchange; constant mean model; Threshold GARCH (search for similar items in EconPapers)
JEL-codes: C10 G10 (search for similar items in EconPapers)
Date: 2023
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