Financial Markets and Electoral Violence in Emerging Economies: Pakistan, May 2013

Abstract

What types of information can financial markets reflect, or even predict, about nation-level political risk? This paper will analyze the differential responses of two markets to election-related violence during an important emerging-market election. The May 2013 general election in Pakistan amounts to a natural experiment in financial market reactions to important political events. The Karachi stock market will be used as a proxy for domestic observers of the election, and the US dollar market in Pakistan sovereign Eurobonds (three issues) will stand as a proxy for international observers. Financial theory holds that the prices of most traded assets immediately and efficiently incorporate all new relevant information. Market observers, analysts, traders and investors act en masse to efficiently reassess the risk profiles of traded assets when new information arises. They "vote" by buying or selling the securities. A recent literature in international political economy has sought to decompose the market price performance of the traded sovereign bonds of emerging market countries in order to gain insights on what these market movements might tell us about country risk. Elections have come in for particular scrutiny. This paper extends the inquiry to the domestic stock markets of the subject nation.