Abstract
Amplified uncertainties in economic, financial, and political environments across nations have created a dire need to search for safe investment options that could mitigate the losses faced by investors due to such uncertainties. So researchers and investment managers have started investigating alternative investment options like real assets, to cope with such risks. Pakistani investors require such investigations more critically because Pakistan is among one of the most politically unstable economies. Previous researches have widely reported gold to be a hedge and safe haven during various economic downturns, therefore, the current study investigates whether gold could also diversify the risk of political uncertainties faced by different sectors of the Pakistan stock exchange (PSX). For this purpose, initially the impact of political uncertainty on PSX sectors and gold is investigated through event study analysis, using economically political and socio-political events from Jan 2009 to Dec 2019. Then Pearson correlation and volatility modeling using event dummies are employed to unveil the diversification characteristics of gold. Gold holds diversification characteristics in case it exhibits zero, negative or insignificant correlations with PSX sectors. Findings suggest that gold is not influenced by political events while most of the PSX sectors are influenced by socio or economical political events. Moreover, gold acts as a hedge for all sectors i.e. indicating zero correlation, and acts as a safe haven for many sectors i.e. indicating negative correlations, and an insignificant relationship indicating the absence of co-movement. So Pakistani investors could consider gold as a diversifier for diversifying traditional investment portfolios.
Highlights
Political events and their negative effects on economic activities have illuminated the need to investigate the role of different assets during political uncertainties(Taimur and Khan 2013)
This research addresses the following research questions; does political uncertainty influence Pakistan stock exchange (PSX) sectors returns? If yes, is gold a diversifier against such political uncertainties? to investigate the diversification potential of gold, the study identifies if gold exhibits any correlation with PSX sectors and whether or not it acts as a hedge and a safe haven during political uncertainties
As Pakistan is among one of the most unstable economies, its crucial that Pakistani investors be aware of which sectors of the Pakistan Stock Exchange are more prone to the risk of political uncertainties and which safe alternative to use to diversify such risk
Summary
Political events and their negative effects on economic activities have illuminated the need to investigate the role of different assets during political uncertainties(Taimur and Khan 2013). Recent political factors are among the dominating ones to be investigated by researchers(Baker et al 2016; Goodell et al 2015; Goodell and Vahamaa 2013; Huang et al 2015; Jens 2017; Liu et al 2017; Vortelinos and Saha 2016) Researchers evaluate their impact on economic growth (Kelly et al 2016), financial markets, and financial instruments(Taimur and Khan 2013.On the other hand, commodities like precious metals have attracted investors because theyre considered a safe option especially when coping with economic downturns. Thats because these assets have a minimum correlation (Rasheed et al 2021). This research addresses the following research questions; does political uncertainty influence PSX sectors returns? If yes, is gold a diversifier against such political uncertainties? to investigate the diversification potential of gold, the study identifies if gold exhibits any correlation with PSX sectors and whether or not it acts as a hedge and a safe haven during political uncertainties
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