Behavioral Finance Perspectives on Pakistan Stock Market Efficiency: The Effect of Uncertainty on Stock Returns and Risk-returns (Volatility) Relationship across Military and Democratic Phases

Abstract

The research is comprised of empirical findings in making a clear perceptive of the sagacity of investors, stock returns, and stock market efficiency behavior in the theoretical frame of behavioral finance pattern. The analyses employed a long extent of Pakistan stock market Returns data from June 1994 to December 2018 along with the two segments of economics which are named as Military phase (1999-2008) and Democratic phase (1994-1998) (2009-2018). OLS (Ordinary Least Square) and QR (Quantile Regression) are performed on future returns and risk-returns (volatility), where the independent variables CPI, GDP, MMR (Money Market Rate), DR (Discount rate) and uncertainty index of Pakistan are taken at yearly based data. The results suggested that future returns are significantly affected by the discount rate and past returns. However, other variables like GDP, inflations, MMR, and uncertainty situations don’t have a significant effect on returns. With regards to military phase all variables like past returns, GDP, discount, and money market rate, as well as uncertainty, have a significant effect of returns. Whereas, in the democracy phase, these returns were not influenced by any macroeconomic factor. With regards to volatility, CPI seems the only factor positively impact share price volatility, all other factors don’t have any significant effect in overall as well as each of the two phases. In case of uncertainty, it remained insignificant for all stages for volatility and returns except in the military phase. The findings imply that macroeconomic policies seem to be significantly impacting return in the military phase as compared to the political phase. That could be because of lower returns that stick lowers mostly due to governance problems. In that case, no policy stimuli could able to affect returns. Moreover, the case of volatility remained uncertain concerning discussed factors.