Abstract
This study intends to find the impact of political and catastrophic events on stock returns of Karachi Stock Exchange (KSE-100 Index). A total of forty three political and four catastrophic events have been considered from May 1998 to September 2013. Political events are further divided into two groups i.e., favorable political events and unfavorable political events. The impact is checked for political, catastrophic, favorable political and unfavorable political events for 1 day, 5 days, 10 days and 15 days event windows. The results suggest that mean returns before and after political events were different on 5 days window. Thus, political events do have an impact on stock returns, however, it does not last longer and returns are normalized afterwards. Similarly, favorable political events also have impact on stock returns only on 5 days window. Unfavorable political events show abrupt (one day) impact and 5 days impact. Catastrophic events show no impact on stock returns using 1 day, 5 days and 10 days event windows. However, the impact was observed on 15 days event window. These results indicate that Karachi Stock Exchange is inefficient in semi strong form.
Highlights
The stock market movements have been keenly studied by many researchers (e.g., Schwert, 1989; Cutler, Poterba & Summers, 1989; Fair, 2002; Kim, 2003)
4.1.1 Impact of Political Events using 1-day Event Window: Referring to Table 4 the P-value using 1day event window is 0.2407. This value is greater than 5% which means that the stock returns before and after political events were not different
5 Conclusion The idea that stock prices absorb the effect of news and not allowing investors to make abnormal profit is termed as Efficient Market Hypothesis
Summary
The stock market movements have been keenly studied by many researchers (e.g., Schwert, 1989; Cutler, Poterba & Summers, 1989; Fair, 2002; Kim, 2003). The purpose is to find out factors that have an impact on stock returns. This strand of research is thought to be connected with the Efficient Market Hypothesis. The factors identified by researchers are economic factors (announcements about interest rates, foreign exchange rate, dividend policy etc.), political events and catastrophic events along with many others (Suleman, 2012). Studies on catastrophic and political news suggest that these events affect stock markets. It is considered that news about political decisions, which could potentially influence domestic and foreign policy are responded by stock markets. According to Tan and Gannon (2002), news that increases investors’ expectations should increase the prices and vice versa
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