Financial Benefits of Peace Discourse between two Belligerent Neighbors
Keywords:Peace Discourse, Stock Market, Abnormal Returns, PSX, Event Study
Political risk is an important factor for an international investor in order to diversify his portfolio. Regional political instability causes hindrance in economic development and therefore influences capital markets in the region. The objective of this paper is to investigate the impact of bilateral peace dialogue between India and Pakistan on stock markets of Pakistan. The study uses a quantitative research design with secondary data as source. The sample includes KSE all shares, and a cross-section of 575 stocks in PSX. The study uses event study methodology of Brown & Warner (1985). The methods of estimation include summery statistics, average abnormal returns summery, and event analysis. The dependent variable is average abnormal returns, and cumulative average abnormal returns, while independent variables are the news of peace dialogues. The sources of data collection includes “Data stream”, and Aljazeera website. Results suggest that abnormal returns of KSE All Share Index are not significant. Only a few peace dialogues occurring on October 19, 2007, April 24, 2008 and July 16, 2009 show significant CARs for eleven days event window. These results imply that peace process should be carefully drafted so that market can feel its presence. Additionally, central issues on Kashmir, Kargil, Siachen and so on should be resolved in order to bring peace in the region. This study contributes to emerging capital markets literature as it guides an international investor in gauging the stock market’s reaction in the wake of political events like peace processes. The study generalizes its findings on PSX only. The future research may consider the impact of peace discourse on stock market of other countries in comparative format.
Abadie, A., & Gardeazabal, J. (2003). The Economic Costs of Conflict: A Case Study of the Basque Country. American Economic Review, 113-132.
Amihud, Y., & Wohl, A. (2004). Politiccal news and stock prices: The case of Saddam Hussein contracts. Journal of Bankin and Finance, 1185-1200.
Bailey, W., & Chung, Y. P. (1995). Exchange Rate Fluctuations, Political Risk, and Stock Returns: Some Evidence from an Emerging Market. Journal of Financial and Quantitative Analysis, 541-561.
Bernanke, B. S. (1983). Irreversibility, uncertainty, and cyclical investment. Quarterly Journal of Economics , 85-106.
Bittlingmayer, G. (1998). Output, stock volatility, and political uncertainty in a natural experiment: Germany, 1880-1940. Journal of Finance, 2243-57.
Brown, S. J., & Warner, J. B. (1985). USING DAILY STOCK RETURNS, The Case of Event Studies. Journal of Financial Economics, 3-31.
Chen, A. H., & Seims, T. F. (2004). The effects of terrorism on global capital markets. European Journal of Political Economy, 349-366.
Hussain, S. M., & Ahmed, S. (2014). The Financial Cost of Rivalry: A Tale of Two South Asian Neighbors. Emerging Markets Finance & Trade, 35-60.
Kim, Y. H., & Jianping, P. M. (2001). What makes the stock market jump? An analysis of political risk on Hong Kong stock returns. Journal of international money and finance, 1003-1016.
Zach, T. (2003). Political Events and the Stock Market: Evidence from Israel. International Journal of Business, 243-266.