Beruflich Dokumente
Kultur Dokumente
FYP Team
Hassan Ali
Shahid Ali
Waqas Ahmed
Chiniot-Faisalabad, Pakistan
2017
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Acknowledgement
In the name of Allah, the Most Gracious, the Ever Merciful. We initiate our project by
thanking the Allah Al-might who allows us to do our project and helps us in every
aspect of life. We feel honor to present this report to not merely a teacher but a mentor
Mr. Gulfam Haider who inspired us with his innovative ideas and made us think in a
complete in aspects.
Finally, we pay regards of gratitude to our parents, as they and their prayers for our
success are always been a pillar of strength for us in our life.
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Dedication
This work is dedicated to our parents for their support, encouragement and endless
love. Moreover we also dedicated to our teachers. Without their support we were unable
to complete this task. At the end we are thankful to FAST School of Management for
giving us remarkable opportunity.
Abstract
This study is aimed at identifying the impact of political issues of Pakistan and macro-
economic events of trade partner countries on performance of Pakistans stock
exchange. To detect the effect and determine magnitude ARCH and GARCH models
have been used. These models are used as data is in time series to analyse time series
data. Nature of data is qualitative as well as quantitative. Quantitative data is
represented by stock returns and qualitative data represent the existence of events.
Political issues and incidents in Pakistan have insignificant impression and macro-
economic events have highly significant impact on performance of KSE 100 Index.
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Table of Contents Formatted: Space Before: 0 pt, After: 6 pt
Formatted: Font: 16 pt, Bold
Acknowledgement ...................................................................................................... III
Dedication ................................................................................................................... IV
Abstract ........................................................................................................................ V
Chapter 1 ....................................................................................................................... 1
Chapter 2 ..................................................................................................................... 54
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3.2.5. ARCH GARCH TARCH Models ............................................................. 11 Formatted: Default Paragraph Font, Font: 11 pt, Check
spelling and grammar
4. Results and Discussion ............................................................................................... 12
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5. Conclusion .................................................................................................................... 17 spelling and grammar
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References .............................................................................................................................. 18 spelling and grammar
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List of Table
Table 1 Unit Root Test............................................................................................ 1514 Field Code Changed
Table 2 LM-ARCH Test ......................................................................................... 1615 Formatted: Font: Not Bold
Table 3 ARCH/GARCH and TARCH Model with Lagged Value 1 ...................... 1716 Field Code Changed
Table 5 ARCH/GARCH and TARCH Model with Lagged Value 2 ..................... 1817 Formatted: Font: Not Bold
Field Code Changed
Table 6 LM-ARCH Test ......................................................................................... 1817
Formatted: Font: Not Bold
Table 7 ARCH/GARCH and TARCH Model ....................................................... 1917
Field Code Changed
Table 8 LM-ARCH Test ......................................................................................... 1918
Field Code Changed
Table 1 Unit Root Test................................................................................................ 11
Field Code Changed
Table 2 LM-ARCH Test ............................................................................................. 12 Formatted: Font: Not Bold
Table 3 ARCH/GARCH and TARCH Model with Lagged Value 1 .......................... 13 Field Code Changed
Table 4 LM-ARCH Test ............................................................................................. 13 Field Code Changed
Table 5 ARCH/GARCH and TARCH Model with Lagged Value 2 ......................... 14 Formatted: Font: Not Bold
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List of Figures
Figure 1 Critical point ............................................................................................. 1514 Formatted: Font: Not Bold
Figure 2 KSE 100 Index Return.............................................................................. 1615 Field Code Changed
Prob = Probability
Dsi= Sit-in-protest
Dbr=Brexit Decision
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Chapter 1 Formatted: Heading 1, Space After: 0 pt, Line spacing:
single, Tab stops: Not at 0.5"
Formatted: Font: Not Bold
1.1.1. Introduction
Formatted
Stock exchange performance is affected by political issues. (Aslam Pervez Memon, Formatted: Space Before: 0 pt
2011) (Aslam Pervez Memon, 2011) Define political issues are ineffective political
parties, feeble political culture and uncertainty of government. Political issues have
positive and negative influence on stock market based on kind and strength of issue.
Political issues like MQM issues, Benazir Bhutto and Salman Taseer assassination, sit-
in protest by PTI and PAT in Islamabad. These are major political issues in
geographical limit that have impact on Pakistan Stock Exchange. Different issues have
different intensity on stock exchange performance. So these issues cause of fluctuation
on KSE 100 index.
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relations and terrorism held in these countries have also impact on Pakistan stock
exchange.
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1.4.1.5. Scope of Study
The scope of our study is KSE100 index return, macroeconomic events of trade partner
countries and political issues of Pakistan The result of this research will only be
applicable on stock exchange.
Chapter 2 Formatted: Heading 1
Performance of stock exchange KSE 100 index can be reflect by return and risk.
(Mohammad, 2011) (Mohammad, 2011) Concluded that KSE give high return with a
high risk as compared to European and American stock exchanges. KSE does not mix
with European and American equity markets which allot the facility to investors to
choice the diversity in their investment portfolio. European and American equity
markets are highly integrated in evaluation of Pakistan equity market. Their research
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also interpret that disturbance in equity markets of America cause of fluctuation in KSE
and their impact vanished after few weeks. (shahzad, 2014) Stated that equity market
of Pakistan faced many rise and fall during last two decades because investors feel
uncertain behavior due to energy crises, local political instability and ongoing terrorist
attacks. These events force to investors to invest foreign securities. They evaluate that
KSE has relationship with other Asian countries like Japan, Taiwan, Malaysia and
China for short period.
Terrorism has effects almost on every country of world. Terrorist activities create
impacts in financial resources, income, stock price and profit of company and effected
nation. Terrorist activities create ambiguity and risk among investors about their
investment and they compel to drawback money from stock market which cause to
decline in share price and stock return. (phuong, 2009) (phuong, 2009) Study terrorist
activities impacts on Pakistan and Iran stock exchanges. He stated notable impact but
different intensity of these activities on these stock exchanges. He narrated that trading
relation also suffer by terrorist activities. (Bilal, 2012) Explore the connection of
terrorism and macro-economic factors on Karachi stock exchange by applying
GARCH, ARCH and other statistical tools. They used daily record data for terrorism
activities and monthly record data for macroeconomic factors occur during the 2005 to
2010. They showed the co-integrated connection of stock return of KSE100 and
macroeconomic factors also find out inverse relation between terrorism and KSE 100
return. Their study showed no significance relation between inflation and KSE 100
index. (kang, 2013)Evaluated that terrorist attacks have affected the stock exchange but
their period is short. How much the stock exchange is affected by the terrorist attack
depends upon the location and number of people killed in an attack. Moreover
perception of future attack is also hit the stock exchange performance. (Memon,
2011)Political instability becomes momentous and menacing problem in under
developing and developing countries. It generates enormous issues and obstructs
development of especially these countries. Political stability has direct effect on
operations of state building and nation because growth requires stable political system.
(Rabia, 2015) Indicated that oil price difference create a negative impact on textile and
chemical industry in stock return. Gas prices have positive impact on textile industry
only. Their study proposed that investors should focus on ups and downs of prices of
gas and crude oil in Pakistan to make it risk averse. (Sarwar, 2014) Investigated that
import, export, oil price and dollar price has significant impact on Pakistan stock
exchange.
Political stability plays key role in stock exchange. KSE has affected by political issues
occur in recent years like sit-in protest in Islamabad. Political events have both pros
and cons impact on stock exchange return. Stock return is also known as Return on
Investment. Previous literature has significantly shown stock return as sign of variance
which is cause of fluctuation on return. Volatile return is a dispersion of securities from
its mean (Bonga, 2014). Volatility can be measured by standard deviation which
describes how strictly stock price are engaged around mid-point. When standard
deviation is small then stock price is highly binding around mean and when standard
deviation is large then stock price far from mid-point.
There is uncertainty in the stock market due to political events and outpost of variation
in trading volume and stock returns. (Arzu, 2011)Evaluated that political event have
positive and negative influence on stock market based on its kind and strength of event.
KSE had affected by several political issues in previous years like, attack on Sri
Lankan team, Ashura condemn, Slaughter of Governor Salman Taseer, Pakistan
momentarily hang NATO supply. These events terminate stock exchange dreadfully
and stock returns effect very badly due to decrease in trading volume. The relation
between stock return and trading volume swing due to nature of events. (Manzoor,
2013) Evaluated the impact of PAK-USA political relationship on KSE 100 index. The
research was based on eight political events. These events are taken as independent
variables while KSE 100 index dependent variable. These events include a 1 st drone
attack by US in Damadol (FATA) in June 1 2006, cancellation of US economic aid by
US administration in Feb 8, 2011, Asif Ali Zardari as a Pakistan president visited
USA in September 22 ,2008. In October 15, 2010 Karry Lugar grant was passed. In 27
January 2011 two people killed by Ramond Davis in Lahore. The Osma Bin Laden was
murdered on May2, 2011. Hillary Clinton as a foreign minister of USA visited the
Pakistan in October 21, 2011. NATTO killed Pak soldiers in 26 Nov 2011. The main
sources of data for this research was Yahoo Finance and Business Recorder. Research
showed that impact of 1st drone attack was not significantly harsh. The impact of
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cancellation of US economic aid was significantly severe. The impact of Asif Ali
Zardari visited US was not noteworthy. Karry Lugar grant was positively significant.
Two people killed by Ramond Davis had significantly negative impact on stock return.
The impact of Osama Bin Laden killed and Hillary Clinton visited had some positive
influence for stock return. The impact of Pakistani soldiers killed had significant
adverse for stock return.
(Murtaza, 2015 )Studied the nine major political issues of Pakistan from 2007 to 2012
to check the impact on Karachi stock exchange 100 index. A researcher divided these
political issues in two windows, One the issues which have more influence to refine
the government policies and second issues which have less or no importance regarding
to refine the government policies. The important events that caused to refine the
government policies include emergency rule in November 5, 2005, Benazir Bhutto
murder in Dec 27, 2005. General Election in February 19, 2008, Chief Justice
Restoration in March 16, 2009, Abbottabad operation in May 2, 2011. Second events
which do not or have less influence to refine the government polices include Musharraf
resignation from president of Pakistan in August 18, 2008, Salala attack by NATTO in
November 28, 2011, Prime minister of Pakistan Syed Yousaf Raza Gillani disqualified
by the supreme court in June 19, 2012, president election in USA in November 7,2012.
The results showed that window one events have impact on stock return while window
two events have no impact on stock return. (Murtaza, 2015 ) (Murtaza, 2015 ) KSE has
affected by political issues occur in recent years like murder of Benazir Bhutto, General
elections in 2008, Salala attack, Abbottabad operation, USA elections in 2012 and sit-
in protest in Islamabad. These events are categorized into two types one are those due
to which government change their policies and other are those which have no effect on
government decisions. Events have no longer effect on stock exchange and stock
exchange stable again within two days. (Akysha, 2009) Political events have impact on
stock return and trading volume. Due to change in trading volume the stock returns
highly moved and also value of correlation changes between stock return and trading
volume.
Unemployment, GDP, retail sales are taken as macroeconomic news in Europe. The
data is used from 2007 to 2012Researchers evaluated that there is a significant impact
of macro-economic news of Europe on TEVICS. The negative macroeconomic news
have generated greater volatility then positive news on TEVICS stock exchange.
(Gulzar, 2011 ) Studied the impact of domestic as well as international macro-
economic news on the stock exchange of Istanbul. The impact checked during period
2002 to 2012. Researchers analyzed that there is no significant effect of foreign macro-
economic news. While the domestic announcements have an effect on volatile return.
Political Issues
Of Pakistan
Stock exchange
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Chapter 3 Formatted: Heading 1
Description: Benazir Bhutto was assassinated in December 27, 2007. DB= 1 is used
at that day and 0 for pre and post days
Otherwise 0
Description: Salman Taseer was assassinated in January 04, 2011. Ds= 1 is used at
that day and 0 for pre and post days.
Sit-in protest:
Otherwise 0
Description: Sit-in protest held on August 14, 2014 to December 17, 2014 by PTI and
PAT.
Dsi= 1 is used for days when event occur and 0 for pre and post days.
Otherwise 0
Description: dp stands for panama paper news leaked. News leaked on April 04, 2016.
Dp = 1 is used for that day when event occur and 0 for pre and post days.
Otherwise 0
Description: Dpr stands for Protest call by PTI in Islamabad. Protest call for October
31, 2016 to November 1, 2016. Dpr= 1 is used for days when event occur and 0
for pre and post days.
Otherwise 0
Description: Dc stands for court call on panama paper. Court call news announced on
November 01, 2016. Dc= 1 is used for days when event occur and 0 for pre and
post days.
Otherwise 0
Description: Dcj stands for new chief oath. Oath ceremony occur on December 31,
2016. Dcj= 1 is used for days when event occur and 0 for pre and post days.
3.1.1.3.1.3 Macroeconomic Events of Trade Partner Formatted: Indent: Left: 0", Outline numbered +
Level: 3 + Start at: 1 + Alignment: Left + Aligned at:
Countries 0.5" + Indent at: 0.85"
Decision of Brexit:
Otherwise 0
Dbr= 1 is used for days when event occur and 0 for pre and post days.
CPEC Event:
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DCP= 1 When event exist
Otherwise 0
Description: China Pakistan Economic Corridor agreement signed on July 05, 2013.
Dcp= 1 is used for days when event occur and 0 for pre and post days.
Otherwise 0
Description: Turkish army attempt to takeover government on July 15, 2016. Dt= 1
is used for days when event occur and 0 for pre and post days
This model is only focus on mean equation while variance is assumed as constant.
But our data is volatile where variance is autoregressive so OLS model mislead.
When there is dispersion in returns of stock then a data is said to be volatile. This
dispersion may be due to events. In this study dependent variable is stock exchange
KSE 100 index. So first of all we calculate stock return.
Different tests applied to check, is data supportive for analyzing study variables.
3.1.3.3.1.5 Unit Root vs. Stationary Formatted: Outline numbered + Level: 3 + Start at: 1
+ Alignment: Left + Aligned at: 0.5" + Indent at: 0.85"
To check the stationary of data, we apply unit root. In unit root variance co variance
and mean depends on time (change with time). While Stationary not depends on time.
Basically we use this test to check either returns are supportive for applying ARMA
model
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3.1.4.3.1.6 ARMA Model Formatted: Outline numbered + Level: 3 + Start at: 1
+ Alignment: Left + Aligned at: 0.5" + Indent at: 0.85"
ARMA stands for Auto Regressive Moving Average. AR (Auto Regressive) Depends
on its lagged value. MA (Moving Average) mean depends on shocks. We cannot apply
only ARMA model as returns are asymmetry in data.
3.1.6.3.1.8 ARCH GARCH TARCH Models Formatted: Outline numbered + Level: 3 + Start at: 1
+ Alignment: Left + Aligned at: 0.5" + Indent at: 0.85"
ARCH stands for Auto Regressive Conditional Hetrosketacity, this model is used as in
study data is predictable from lagged value and second model is Generalized ARACH
used to check the volatile in time series. M-GARCH stand for GARCH in mean
equation, is applied to identify significant impact of volatility on return. Threshold
Autoregressive Conditional Heteroskedasticity. TARCH represent Threshold ARCH
model used to examine the significant difference between negative and positive
volatility of events.
4.4.1 Results and Discussion Formatted: Outline numbered + Level: 1 + Start at: 1
+ Alignment: Left + Aligned at: 0" + Indent at: 0.25"
After calculating the stock return, unit root test is applied. The result of unit root test
are shown in the following table:
H1; Stationary
Where t-calculated is -30.09599 and critical points at 1%, 5%, and 10% level of
significance are -3.432821, -2.86 and -2.56 respectively. As Probability is 0.000<5%
so null hypothesis is Rejected, It mean returns are stationary and Stationary data
allow to apply ARMA model.
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But as shown in graph there is fluctuations in return.
1475
1
1006
1073
1140
1207
1274
1341
1408
1542
1609
1676
135
202
269
336
403
470
537
604
671
738
805
872
939
-0.02
-0.04
So, there may be ARCH effect. No theory support for estimating from lagged value so
we use ARMA model and we need to calculate the variance equation parallel to the
mean equation. ARCH- LM test is applied for identifying about ARCH effect.
Hypothesis
As in table Prob. is 0.0000<5%, so null hypothesis is rejected which shows that there
is ARCH effect. As there is still ARCH Effect so proceed further to capture ARCH
effect by applying ARCH and GARCH model.
By applying ARCH, GARCH, TARCH model with lagging value 1 and GARCH in
Mean equation.
In above table, ARMA represent mean equation in which, Square root GARCH
represent GARCH in mean and Prob. 0.000<5% shows there is significant impact, C is
constant. Similarly Prob. of Autoregressive with Lagged 1 shows significant impact.
In second Box ARCH GARCH represent Variance equation, C is constant, Residual (-
1) ^2 shows ARACH equation and its prob. shows that it is significant. In this box,
second equation represent TARCH equation and prob. shows significant impact. In this
box last one is GARCH equation and its prob. shows significant impact.
Observed R- 7.6813
Squared
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In table, probability F 0.0056<5% shows that there is still ARCH effect. So proceed
further by taking 2nd lagged value to captured ARCH effect.
By applying ARCH with lagging value 2, and GARCH and TARCH model with
lagging value 1, and GARCH in Mean equation
In table, The ARMA represent mean equation in which, square root GARCH represent
GARCH in mean and Prob. 0.000<10% shows there is significant impact, C is constant.
Similarly Prob. of Autoregressive with Lagged 1 shows significant impact. In 2nd Box
ARCH GARCH represent Variance equation, C is constant. Residual (-1) ^2 shows
ARACH equation and its prob. shows that it is significant. In this box 2nd equation
represent TARCH equation and prob. shows significant impact. Residual (-2) ^2 shows
ARACH equation with 2nd lagged value and its prob. shows that it is significant. In this
box last one is GARCH equation and its prob. shows significant impact.
In mean equation, Turkish Army (DTA) prob. is 98%>5% shows insignificant impact
on return and MQMI prob. is 81%>5% shows insignificant impact on return. In
Variance Equation sit in protest by PTI (DSIP) prob.is 0.93 %< 5% shows significant
impact, CPEC prob. is 5.42 %<10% shows significant impact, Benazir Bhutto
Assassination (DBBA) prob. is 0.02 %< 5% shows significant impact, Brexit decision
(DBR) prob. is 19.74%>10% shows insignificant impact.
Observed R- 0.4117
Squared
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As shown in table Prob is 52%>5% which shows that in result there is no ARCH Effect.
So the results presented (table 7) highlighted that mean equation is valid.
Chapter 5 Formatted: Heading 1
First objective of this study is to identify the impact of political issues on KSE 100
index. It is highlighted by results that some political issues like assassination of Benazir
Bhutto assassination has significant negative impact on KSE 100 index. So it is
necessary to make strategy to overcome these type of issues. Second objective of this
study is to examine impact of macro-economic events of trade partner countries of KSE
100 Index and results shows that macroeconomic event like CPEC has highly positive
significant impact on KSE 100 index. As from all our study variables coefficient of this
variable shows negative sign which convey that it decreases the volatility and is in
favor of economy. So we need to have more focus on this variable. Third objective of
this study is to check TARCH effect and results shows that there ispresence of
significant difference between positive and negative volatility due issues or events.
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References
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Iftekhar Hasan, H. S. (2012). Growth Strategies and Value Creation:What Works Best
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Shahzad, A. (2014). A Study on Co-integration of Pakistani Stock Market with
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