Impact of Terrorism, Political System and Exchange Rate Fluctuations on Stock Market Volatility

Document Type : Research Paper

Authors

1 Department of Business Administration, Allama Iqbal Open University Islamabad, Islamabad, Pakistan

2 Department of Management Sciences, COMSATS Institute of Information Technology, Islamabad, Pakistan

Abstract

Terrorism, political system instability and currency rate fluctuations are the three most evident issues of 21st century. In this study, comparative analysis is performed to check the impact of all these issues on PSX Volatility. EGARCH (1,1) approach is used on four different kinds of data collected from 1st January 2000 to 31st December 2015. Terrorist events, FX return fluctuations with restoration of democratic political system in Pakistan are considered in this study. Results confirm that democratic political government reduces PSX volatility while terrorism increases it. Terrorist attacks are categorized into various categories. Event day analysis confirms that Pakistan stock market (PSX) is efficient enough to absorb the effects of terrorist attack within a day. Holding portfolios and performing arbitrage activities by the investors diversify the risks due to foreign exchange (FX) fluctuations which show no significant impact on PSX volatility.

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References

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Interdisciplinary Journal of Management Studies (Formerly known as Iranian Journal of Management Studies)
Volume 11, Issue 3
September 2018
Pages 519-546

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