Influence of Terror on Pakistan Stock Market Returns

Influence of Terror on Pakistan Stock Market Returns Abstract This paper examines the influence of political instability and terror on Pakistan stock market returns between 1997 and 2010. The study constructs three variables that quantify political instability and terror and examine the effect on country stock return. This study seeks to apply the Generalized Autoregressive Conditional Heteroskedasticity (GARCH) model to assess the impact of these variables on stock market returns and volatility using daily time series data for KSE. Results for KSE showed strong support for the hypothesis that bad news exerts more adverse effect on stock market volatility than good news of the same magnitude. Furthermore, terror and regime have significant negative impact while war has positive but insignificant effect on stock market volatility. JEL Classification: O40, C32. Keywords: Terror, Regime, political instability, growth, ARCH/GARCH. Introduction Many people agree that stock prices sometimes behave in bizarre ways. Markets are pretty tough and quite difficult. In the world of todays no one can negate the importance of stock markets. Stock market acts as a barometer for any countrys economy. In todays information-oriented world, news travels very fast and contagion can spread quickly and capital markets become more flexible and are absorb shocks brought on different news such as terrorism, political instability etc. Stock market of Pakistan is going through quite rough patch from many years. The change of political government and later on the terrorists attacks have badly affected the stock market and make the Pakistan Stock Market unreliable place for investment. As by seeing the overall scenario of Pakistans stock market during that time period it was not difficult for prices to follow certain patterns that support the rejection of Random Walk Hypothesis. This paper examines the impact of change in government, war and terror on economic growth in the Pakistan. Pakistan is one of those episodic-democratic countries who are facing continuous upheavals and socio-political disruptions since their inception. Military interventions could be witnessed in the political history of Pakistan. More over intervallic wars with India, strikes, antigovernment demonstrations and most importantly the ongoing war on terror have popped Pakistan to prominence on the socio-political platform. Such sociopolitical flux, terrorist attacks and other disruptions can have serious implications for stock price movement because stock prices reflect investors expectations about the future and these stock price movements on aggregate can generate a surged wave of activity. There has been an extensive work on study of stock market returns and volatility with respect to the fundamental variables and the macroeconomic variables but a diminutive work has been done so far to study the impact of socio-political factors on the stock market volatility in Pakistan. The existing literature on impact of socio-political factors on stock returns volatility is quite inadequate especially if we talk in context of Pakistani market. Masood Sergi (2008) analyzed Pakistans political risks and events that have affected the Pakistani stock market since its independence but their study chiefly covers the political events. Terrorism and strikes which have recently become the matters of intense interest and the source of unrest in the economy are the missing part there. The Karachi stock market is rapidly converting into a volatile market. If we see figure below it showed that there are high volatility during 1997 to 2010. This cannot be viewed as a positive sign for this emerging markets like Stock market of Pakistan. Though heavy fluctuations in stock prices are not an unusual phenomena and it has been observed at almost all big and small exchanges of the world. But focusing on the reasons for such fluctuations is instructive and likely to have important policy implications. The efficient market hypothesis argued that changes in stock prices are mainly dependent on the arrival of information regarding the expected returns from the stock and risk associated with that stock. (See Figure 1.1) So the purpose of our study is to examine empirically the impact of socio-political instability on Pakistani stock market. This study examines the three factors and their impact on the Pakistani stock market; the political instability due to military interventions, 1999 Kargil war, and terrorism. Literature Review A number of theoretical and empirical articles argue that these factors hinder economic growth of a country. Cutler, Poterba and Summers (1989) claimed that the sock prices move in response to the information other than about the fundamental values. They estimate the fraction of stock returns that can be accredited to various kinds of economic and non-economic events including assassinations of important political or national figures, war, invasions, raids and major policy change but their findings suggests a very small effect of non-economic news on the share price. Most of the studies have found a significant impact of political news or events on the stock market behavior. Chan Wei (1996) studied the impact of political news on the stock market volatility in Hong Kong and using GARCH-M model they found the strong evidence of the impact of political news on stock market volatility inferring that unfavorable political news is correlated to negative returns for the Hang Seng Index and vice versa. Mei Guo (1999) examined the impact of political insecurity on the financial crises in emerging markets and they observe that market volatility increased during political election and transition periods and political uncertainty could be a major contributory factor to financial crisis. Similarly Kim Mei (2001) infered through empirical analysis using GARCH(1,1) filter that the political risk affect the stock market volatility but this impact of political events or news is asymmetric, with bad news having a greater influence on volatility relative to good news. However Voth (2001) have argued that the impact of political factors in studies on German market has been over stated. He argued that the majority of events escalating political uncertainty had a minute or no effect on the value of German assets and the volatility of their returns. Instead, it was inflation that is mainly responsible for most of the variability in stock returns. He suggests that there is no direct linkage between the political factors and the stock market, however through channel it impacts. But Voth (2002) in a panel study of a set of 10 countries using panel regression confess that during great depression political risks changed dramatically over the period, and are adequate to account for a large part of the boost in stock price volatility. Beaulieu, Cosset Essaddam (2002) examined the impact of political risk in Canada on the volatility of stock returns, covering important political events in the country. Their study suggested that political news performs a significant role in the volatility of stock returns. Moreover the volatility of stock returns also depends on the degree of how much a firm is exposed to political risk i.e. the structure of its assets and the level to which there is foreign involvement. Kutan Perez (2002)Â  also found a significant impact of social and political factors on stock return volatility in their study conducted on Colombian stock market. Bautista (2003) applied Regime-switching-ARCH regression on Philippine stock returns to estimate its conditional variance and the estimated volatility was then related to major political and economic events. Their study revealed that the Philippine stock market is sensitive to radical changes in the political situation. Moreover the series of military takeover attempts during late 1980s in Philippines lead to hefty fluctuations in stock market index. Masood Sergi (2008) analyzed political risks and events that have affected the Pakistans stock markets since its foundation. They have found that Pakistans political risk carries a significant risk premium of between 7.5% and 12%. They made forecasts using Bayesian hierarchical modeling and Markov Chain Monte Carlo (MCMC) techniques and found that there is relatively high probability of occurrence of events with an average arrival rate of approximately 1.5 events per year. Many others also wrote that political instability warped the future path of investment decisions (Calvo and Drazen (1997), lessened public investment leading to a shift of government budgets from capital spending to government consumption (Darby, Li and Muscatelli (1998), and makes governments less inclined to make improvements to the legal system (Svensson (1993) Wars and unrest at the borders creates instability and panic among the investors that could affect the stock market movement at large. The affect of war has been analyzed in many studies including Cutler, Poterba and Summers (1989), Aggarwal, Incaln Leal (1999) and in Pakistan Masood Sergi (2008). Aggarwal, Incaln Leal (1999) examined the sort of events that cause large swings in volatility of emerging stock markets. For this purpose they examine various social, political and economic events both at global and domestic level to find out their explanatory power in context of the returns volatility in the emerging markets including the impact of gulf war. Though at small scale but the impact of gulf war was felt in those emerging markets. Similarly Masood Sergi (2008) found that among other factors that they studied, wars with India, 1948, 1965, 1971 and 1999 kargil war negatively influenced the Pakistani stock market. Evia et al. (2008) examined the affect of socio-political conflict in Bolivia on economic performance. Factors studied widespread during the conflicts as strikes, demonstrations, road blockades, and conventional rent-seeking. Their results showed that economic growth due to external factors is positively related to conflict while growth due to productive investment is negatively related to conflict. Terrorism is another as put that has been studied in relation to economic activity. Many studied in this distance; produced conflicting results as Becker and Murphy (2001) argue that economic performance are not much affected, because terrorist attacks usually devastate only a small portion of the overall stock of capital in a country. By contrast, Abadie and Gardeazabal (2005) repeated that terrorism shape overall economic risk in a country and lead to the economic shakiness in the country. They also conclude their study that higher level of terrorism risks results into the lower levels of foreign direct investment (FDI). Almost all studies on terrorism and its influence on stock prices limited to only on a single or few events, such as the 11 September 2001 attacks, as considered by Hon et al. (2004) Chen and Siems (2003) study. Chen Siems (2003), used event study methodology to capture the aftermath of terrorism on global capital markets. They studied on the reaction of U.S. capital markets in response to terrorist attacks. Their results showed that capital markets of US are more resilient flexible than in the past and recover quicker from terrorist attacks than other global capital markets. Their study suggests this increased market resilience to be partially explained by a stable financial sector in US that provides adequate liquidity to support market stability and reduce the spread panic. Methodology and Data Description Stock index data is taken from Karachi Stock Exchange, Yahoo Finance. This is a well known and reliable source of business information in Pakistan. The daily closing value of KSE-100 index is used for calculating the daily returns. The continuously compounded annual rate of return is used to measure the returns for the specific period as; Rt = ln (Pt / Pt-1) The closing prices of KSE-100 index for Karachi Stock Exchange are taken for the period July 2, 1997 to Oct 13, 2010. Our proxies are TERROR, a dummy variable of terrorist incidents during this period; REGIME, a dummy variable for government changes from fully democratic government to Marshal Law or democratic under such condition; a dummy variable for the period of the Kargal War in 1999. We applied regression model and Arch/Garch technique to capture the results. ARCH/GARCH Study Models This section presents the methodology of the paper. Daily data for Karachi stock markets were obtained from Yahoo finance and data for terror, kargal war and regime were obtained from South East Asia Terrorism Portal, and Different News Paper of Pakistan. Study apply ARCH/GARCH tools to see the long term relationship of these variable taking stock return as dependent variable and terror, regime and kargal war as independent variables. As aggregate uncertainty may be a function of political instability, we proceed to model uncertainty directly. It is natural to look at the conditional variance of output. Thus, we examine GARCH processes, in a more general framework than in the previous section. The model estimated here is a GARCH (1,1) process. Engle (1982) argue that in high frequency data large and small disturbance errors appear in group therefore error term variances can be shown as a function of their lagged values. He calls it Autoregressive conditional Heteroskedasticity (ARCH). As an investor or policy maker, we might be interested in investigating the returns and variance financial assets over observable period of time (conditional) rather than long run estimate of variance (unconditional). Engle (1982) shows that it is possible to describe the conditional mean and conditional variance of a financial asset using information set of previous period; Where is the return of financial asset in time t conditional on the information set at time t-1. E represents the expected value in statistics. Consider the simple model Where Where the rate of is return and are the regression parameters. A typical ARCH model can be written as follows: Conditional Mean Equation; Error Decomposition OR where ‘v is the part of variance which is homoskedastic and is the conditional variance which is Heteroskedasticity. This conditional variance can be shown as ARCH Conditional variance Equation, i.e. where and are non negative. Engle (1982) has also derived a Lagrange Multiplier (LM) based principle to test the hypothesis of. Another useful variant of ARCH methodology, proposed by Bollerslev (1986) is the generalized ARCH or GARCH model. Bollerslev (1986) argues that conditional variance in financial series is not only the function of its lagged error term but also the function of its lagged conditional variances. Therefore, GARCH (1, 1) process would be So GARCH model helps to explain the conditional variance with the help of past squared error term and conditional variance lag value. Which also means that conditional variance at time‘t would be function of long run variances and also variances conditional on past information set (short run) or observed shocks i.e. . Testing for ARCH/GARCH effects: Before estimating Arch/Garch techniques, it is first important to check for possible presence of Arch effect in order to know which model is requires the ARCH estimation instead of OLS (Ordinary Least Squire). The presence of ARCH effects in a regression model does not invalidate OLS estimation. However it implies that there is more efficient nonlinear estimator than OLS. (See Table 1.1) Obs*R-Squared is 147.26 and has a probability limit of 0.000. This clearly suggested that ARCH effect is present and presence of Heteroskedasticity suggested that ARCH/GARCH is appropriate model for this type of time series data. So we can apply ARCH/GARCH model on this data instead of ordinary least squire regression. Result of GARCH effects: The results of GARCH are presented in Table 1.3. The first column presents the regression results when we include as independent variables dummy values of the regime, terror, and war. In most of the cases, the variables enter with the anticipated signs, but not all of them are consistently significant at the 0.05 level. We can see an evidence of significant negative impact of terror, regime that show due to bomb blast in Pakistan and change in government negatively impact the country stock return in long run while insignificant positive impact of war on the country stock return. The results can further explained that stock return volatility every day is explained by approximately 71% of the previous months return volatility for Karachi stock exchange. This is significant for KSE returns. The coefficient of return innovation are statistically significant for market implying that new information arrival into the markets has significant impact on predicting next days stock market volatility. Because, the constant term in the variance equation for KSE is significant. The results of GARCH (1,1) are presented in Table 1.3 (Table 1.2) The model can be written as; Mean Equation: = 0.001188+ 0.064048* R_KSE(-1) Variance Equation: GARCH = 4.01E-05 + 0.20721*ARCH+ 0.713458 GARCH(-1) 1.21E-05*Terror + 1.93E-05*War -1.48E-05*Regime The persistence parameter for KSE Durbin-Watson stat = 1.943, which is > 1. This show a very explosive volatility in KSE returns. It also demonstrates the capability of past volatility to explain current volatility (Engle and Bollerslev, 1986) and because it is very high, the rate at which it diminishes is rather very slowly. For ACRH/GARCH, conditional standard deviation and conditional varience graph were as shown in figure 1.2 and 1.3; The GARCH coefficient is both statistically significant and conforms to expectation. This implies that past variances exert significantly positive effect on stock return volatility in KSE. On the basis of these results, it is evident that there is significant time varying volatility in Pakistan stock market returns during the sample periods. Conclusions and Recommendations In this paper, we have estimated a nonlinear GARCH model for daily stock returns volatility and terror, Kargal war and regime in Pakistan. Data for the estimation of GARCH (1,1) models was obtained from Yahoo finance and South Asia Terror Portal and news paper of Pakistan. The asymmetric effect of terror, war and regime on stock returns and volatility was investigated. Preliminary investigation into the nature of the data reveals that study had to employ ARCH/GARCH techniques for data analysis. Firstly, results show evidence of time varying volatility in stock market returns across the market and from the asymmetric model, results indicate that bad news has larger impact on stock volatility than good news in the KSE. The result for KSE showed that terror and regime has negativity impact on returns of KSE while war has positively effect, it may be due to short term period of the war. All three variable are significantly have their impact on the returns.

Show on a Diagram How a Monopoly Firm Will Make Supernormal Profits by Restricting Ouput

Show on a diagram how a monopoly firm will make supernormal profits by restricting output. Discuss how the theory of contestable markets could impact on the price and output of a monopoly. Neo-classical theory defines monopoly as a market structure where one dominant firm supplies most or all output in the industry without facing competition because of high barriers to entry to the industry. The monopolist is a short run profit maximiser and due to the demand under a monopoly being moderately inelastic at any given price, the monopolist is said to be a price maker, unlike perfect competition where the firms are price takers. The diagram below shows the monopoly making supernormal profits by restricting output. The equilibrium profit maximising level of output is 0A where MC = MR, and price will be 0p. Supernormal profits are made, shown by the area on the diagram shaded red. If profit maximisation was not an objective for a monopoly, it might produce at the bottom of its average costs curve (AC). Thus, price being lower than P and quantity produced would be greater. However, because a monopoly is partly defined by wanting to profit maximise in the short run, this is not the case. C AC Price Quantity mR p A Demand 0 Under perfect competition, supernormal profits can only be made in the short run, due to low barriers to entry. The monopolist can earn supernormal profit in the short and long run due to not having to produce at the bottom of the AC curve and having high barriers to entry. These barriers to entry, preventing other potential new entrance from coming in and competing with the monopoly can take various forms. Perhaps the monopoly has control over the source of an essential raw material. Perhaps the monopoly has extremely strong brand loyalty and takes great care to protect its brand image and the loyalty of its consumers through extensive marketing. It has been shown that neo-classical theory suggests that high barriers to entry will earn supernormal profits for a monopoly. Contestable market theory, in which states that there is freedom of entry to the industry and where costs of exit are low, suggests that a monopoly will earn supernormal profits dependent to a large extent on the costs of exit from the industry. If the costs of exit from the industry are low, then the monopoly arguably won’t make supernormal profits in the long run. If a monopoly in the short run is charging high prices and earning supernormal profit, a competitor will enter the industry and take some market share from the monopolist by charging a lower price. The monopolist will react by reducing prices, forcing the new competitor out of the industry. This happens because the competitor cannot compete with the new lower prices set by the monopolist due to its costs being too high. Thus, if the costs of exit from the industry are low, it is worth the competitor entering the market and having earned supernormal profits in the short run. Though, once the competitor has left the industry and the monopolist raises its price again wanting to earn supernormal profits, another competitor will enter the industry reducing the monopolists overall profits and taking market share away from it. Clearly the only way to avoid potential competitors from adopting ‘hit and run’ tactics would be for the monopolist to price at a level where it only earned normal profits. In the long run the monopolist will increase output and decrease price, operating at the optimal level of output where MC = AC. Thus in conclusion it has been shown that a monopoly will make supernormal profits by restricting output. The monopoly chooses the output level to produce at, and wanting to profit maximise, it produces at the point where marginal costs equals marginal revenue. In contestable market theory, the established firm, the monopoly, must behave as if it operates in a perfectly competitive market to prevent ‘hit and run’ tactics by potential competitors, producing where MC = AC.

Facts, Fiction and List of Essay Topics for Middle School

Facts, Fiction and List of Essay Topics for Middle School List of Essay Topics for Middle School Fundamentals Explained The Civil war was among the deadliest wars that ever happened in the us. Deciding upon an emotional topic is also a great idea. You don't have to have legal education. F. Bacon The main intention of the capital isn't to get as much money as possible, yet to make sure that money causes a better life. Whispered List of Essay Topics for Middle School Secrets You first have to establish the reason behind your essay, before it's possible to write persuasive content about it. Read the list and stay in mind that interesting topics are a correct way for an intriguing assignment. An excellent topic should concern actual problems to pull reader's interest. Third, selecting an intriguing topic is an important skill you should master to have a high grade. Finding the most suitable arguments will allow you to prove your point and win. All your statements need to be supported with facts. To the contrary, you might not have been supplied a particular topic in the slightest. When you are requested to choose a great topic for your argument, start with something you're acquainted with. If you are in need of a fantastic essay but have zero opportunity to write it yourself, visit our site and get it. Among the ideas on how to have the interest of your audience is to opt for an emotional topic. In the majority of instances, you want to develop a topic which will enable other people to realize your perspective, and telling them to think that what you write is true. Anyway, in case you still have some trouble with writing, we are here in order to provide help. Creating expository essays is part of your middle school career, which means you need to learn how to compose them properly. In various other tests, you will be shown the gre essay topics to write about. For a student in the center school the typical topics are associated with science and history. Topic of argumentative essay shouldn't be obvious. Understanding how to compose a strong argumentative paper can help you advance your very own argumentative thinking. There are a fantastic number of essays which are believed to be most useful for college applicants. Every American should learn how to speak Spanish. When you write this kind of essay, you should give the reader with a specific statement and stick to it throughout the text. In this kind of situation, it's more convenient to locate ready-made essays and use them as an example. It's needless to say that you should go for a subject that you regard as interesting. For a 6th-grade pupil, choosing only the ideal subject for the upcoming essay might be a genuine challenge. Even if not one of them will interest you, you will without a doubt get more useful info and inspiration for your upcoming work. Even in the event you lack some of them, you should attempt to write it upon your own to observe how it all works. Every family needs to have a all-natural disaster survival program. It's interesting how it's applied to gaining writing skills. You won't even notice the way the hours of research pass, as you'll be too absorbed with the new intriguing facts which you find in the practice. Should you do, you've started failing the test already. Yearly driving tests ought to be mandatory over a particular age. They should be mandatory for the first five years after getting a license. For this reason, you ought to be prepared to not only present your position but in addition support and defend it with the assistance of the solid facts. During the development of the short article, you're expressive a specific point of view and then offering supporting evidence to demonstrate your point. You should have your reasons, and our principal concern is that you wind up getting a great grade. Attempt to pick one which you truly feel strongly in favor of a single side AND one which is not overly common.

The Enlightenment Was A Life Changing Time Period For...

The Enlightenment was a life changing time period for Americans. I believe that the best definition to ascribe to the Enlightenment would be to shed light on. Whether it is a subject, object, or opinion, all of the definitions made sense to me. One of the reoccurring themes we hear about in this era is religion. The new American religious figures of this time, like pastor/preacher Jonathon Edwards, desperately wanted to break away from the old world doctrines of Europe. In an attempt to get people on board with the new spiritual awakening that was taking place, Edwards used scare tactics in his sermons, that gave his followers the impression that if their souls did not become saved, and they did not dedicate their lives to their religion, they would be deemed to spend eternity in hell, paying for it. 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