Financial Benefits of Peace Discourse between two Belligerent Neighbors

Abstract

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.