Stock Market Reaction to Good and Bad Political News

Abstract

Research on political risk tends to elucidate that political news affects financial markets. Especially stock markets respond to new information regarding political decisions that may affect domestic and foreign policy. In this paper we analysed the consequence of political news on stock market returns and hence its volatility. For this purpose we split the political news into two categories (good and bad news). Daily data from Karachi Stock Exchange is used to observe the effects of political news on the stock market. Further we studied the returns of different sector indices to examine either they are also affected by the political news or not. We used univariate asymmetric GARCH model, to gauge the impact of political news on returns and volatility. Our results show that good news have positive impact on the returns of the KSE100 index and also decreased the volatility. On the other hand, bad political news has negative influence on the returns (decrease the returns) and increase the volatility (positive effect). Furth, our results also confirm that bad news has stronger effect (almost double) on the volatility than good news. Most of the sectors are also affected by the good and bad news in the same way as KSE100 index. We also find that the results of a few sectors (oil and gas, financial, health care) are not statistically significantly in respond to good and bad political news, indicating that this type of news does not affect the returns or volatility. Our results show that the sectors which respond more towards good news (volatility decreases more than that of other sectors such as basic material and industries) has lower beta, suggesting variance moves quickly through the time.