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Final Year Project Style Definition: Title: Font: Bold


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Impact of Political Issues of Pakistan and Macro-


Economic Events of Trade Partner Countries on
Pakistan Stock Exchange (KSE 100 index)
PerformanceImpact of Political Issues of Pakistan and
Macro-Economic Events of Trade Partner Countries
on Pakistan Stock Exchange (KSE 100 index)
Performance

FYP Team
Hassan Ali

Shahid Ali

Waqas Ahmed

Supervisor: Mr. Gulfam Haider

Co-Supervisor: Mr. Hammad Majeed

FAST School of Management

National University of Computer & Emerging Sciences

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.

III | P a g e
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

List of Table ......................................................................................................... IXVIII

List of Figures .......................................................................................................... XIX

Abbreviations ........................................................................................................... XIX

Chapter 1 ....................................................................................................................... 1

1.1. Introduction ....................................................................................................... 1

1.2. Study Gap ..................................................................................................... 2

1.3. Significance of study..................................................................................... 2

1.4. Objective of study ......................................................................................... 2

1.5. Scope of Study ............................................................................................ 43

Chapter 2 ..................................................................................................................... 54

2.1. Literature Review............................................................................................ 54

2.2. Theoretical Framework: .............................................................................. 98

2.3. Hypothesis .................................................................................................. 98

Chapter 3 ................................................................................................................... 109

3.1. Methodology ................................................................................................. 109

3.1.1 Data description .................................................................................... 109

3.1.2 Political Issues of Pakistan................................................................ 109

3.1.3 Macroeconomic Events of Trade Partner Countries ....................... 1110

3.1.4 Stock Returns .................................................................................. 1211

3.1.5 Unit Root vs. Stationary .................................................................. 1211

3.1.6 ARMA Model ................................................................................. 1413

3.1.7. LM ARCH TEST ............................................................................ 1413

3.1.8 ARCH GARCH TARCH Models ................................................... 1413

Chapter 4 ................................................................................................................. 1514


Formatted ...
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4.1 Results and Discussion ............................................................................... 1514
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Chapter 5 ................................................................................................................. 2120 Formatted ...
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5.1 Conclusion .................................................................................................. 2120
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References ............................................................................................................... 2221 Formatted ...
Acknowledgement ................................................................................................................ III Formatted ...
Formatted ...
Dedication .............................................................................................................................. IV
Formatted ...
Abstract.................................................................................................................................... V Formatted ...

List of Table ........................................................................................................................ VIII Formatted ...


Formatted ...
List of Figures ........................................................................................................................ IX
Formatted ...
List of Equation ..................................................................................................................... IX Formatted ...
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Abbreviations .......................................................................................................................... X
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1. Introduction .................................................................................................................... 1 Formatted ...
1.1. Study Gap ............................................................................................................... 2 Formatted ...
Formatted ...
1.2. Significance of study ............................................................................................. 2
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1.3. Objective of study.................................................................................................. 2 Formatted ...
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1.4. Scope of Study ....................................................................................................... 2
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2. Literature Review .......................................................................................................... 3
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2.1. Theoretical Framework:........................................................................................ 7 Formatted ...
Formatted ...
2.2. Hypothesis .............................................................................................................. 7
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3. Methodology .................................................................................................................. 8 Formatted ...

3.1. Data description ..................................................................................................... 8 Formatted ...


Formatted ...
3.1.1. Political Issues of Pakistan .......................................................................... 8
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3.1.2. Macroeconomic Events of Trade Partner Countries ................................ 9 Formatted ...
Formatted ...
3.2. OLS Regression and Volatile Data ................................................................... 10
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3.2.1. Stock Returns............................................................................................... 10 Formatted ...
3.2.2. Unit Root vs. Stationary ............................................................................. 10 Formatted ...
Formatted ...
3.2.3. ARMA Model.............................................................................................. 11
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3.2.4. LM ARCH TEST ........................................................................................ 11 Formatted ...

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3.2.5. ARCH GARCH TARCH Models ............................................................. 11 Formatted: Default Paragraph Font, Font: 11 pt, Check
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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 4 LM-ARCH Test ......................................................................................... 1716 Field Code Changed

Table 5 ARCH/GARCH and TARCH Model with Lagged Value 2 ..................... 1817 Formatted: Font: Not Bold
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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

Table 6 LM-ARCH Test ............................................................................................. 14 Field Code Changed

Table 7 ARCH/GARCH and TARCH Model ........................................................... 14 Field Code Changed

Table 8 LM-ARCH Test ............................................................................................. 15 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

Figure 1 Critical point ................................................................................................. 12 Field Code Changed

Figure 2 KSE 100 Index Return.................................................................................. 12 Field Code Changed


Formatted: Font: Not Bold
Field Code Changed
Abbreviations
KSE = Karachi Stock Exchange

Prob = Probability

ARMA= Auto Regressive Moving Average

ARCH= Auto Regressive Conditional Heteroscedasticity

GARCH= Generalize Auto Regressive Conditional Heteroscedasticity

TARCH= Threshold Auto Regressive Conditional Heteroscedasticity

DB= Benazir Bhutto Assassination

Ds= Salman Taseer Assassination

Dsi= Sit-in-protest

Dp= Panama Paper News

Dpr= Protest call

Dbr=Brexit Decision

DCP= CPEC = China Pakistan Economic Corridor

Dt= Turkish Army try to Takeover

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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

Financial market is a key factor in the development of any country. I as it provides


opportunity for circulation of surplus and deficit units. Stock exchange is the main
pillar of financial market. It is secondary market where securities of listed companies
are traded. It is a preliminary legal entity of financial institutions which behaves as
trading market for both investors and listed firms under the government contraption
(Iftekhar Hasan, 2012).. Presently lLess mature stock markets are critical sign for
economic growth of a country. Stock exchange performance is always fluctuated by
different kind of events like energy crises, political issues, macroeconomic events,
inflation and terrorism, etc. In this study, we will only focus on political issues and
macroeconomic events of trade partner countries.

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.

Fluctuation indicate volatility in stock return. Volatility is a dispersion from mean


point. Some political issues create positive volatility and some create negative volatility
depends upon nature of issues.

Similarly, macroeconomic events of trade partner countries have also influence on


stock exchange performance. (Liargovas, 2010) Considered macroeconomic events
like train bombing in Madrid (Spain) in 2004, Terrorist attack on World Trade Center
on 09 September 2001, and London train in 2005 to check Greek bank sector
performance in stock. Macroeconomic events of Trader partner countries have
affecteffect on Pakistan stock exchange. Major trade partners of Pakistan are China,
European Union, Saudi Arabia, USA, and Kuwait. Events such as oil price trade

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relations and terrorism held in these countries have also impact on Pakistan stock
exchange.

As recent macroeconomic events like decision of Brexit had an impacted on on Karachi


Stock Exchange 100 indexes instantly but in short term. KSE 100 index falls fell by
2% in opening stock after their decision (Reuters, June 24, 2016) (Aazim, JUL 04,
2016). Stock exchange face 4.6% massive fall due to oppositions parties call for sit-in
protest in Islamabad.

1.1.1.2. Study Gap


Previous researcher (Memon, 2011) (Manzoor, 2013) (Muhammad Irfan Chani, 2011)
(Sidra Malik, 2009) (Arzu, 2011) Showed a lot of research in political issues and trade
of specific product of other countries with Pakistan. However little attention has been
given to political instability in geographical limit in recent years and also has less focus
on macroeconomic events of trade partner countries effect on Karachi stock exchange
(KSE 100 indexes). Our mMain focus of this study will be on macroeconomic events
of trade partner countries like China Pakistan Economic Corridor (CPEC), Turkish
armys try attempt to take over government, Brexit decision and political issues of
recent years like sit-in protest of political parties, series of PANAMA news. These
events created shocks in Pakistan Stock Exchange. In result of these shocks, investor
inject or eject their investment from stock exchange which is a cause of volatility in
stock return.

1.2.1.3. Significance of study


The importance of this study is to identify the fluctuation in volatility return. We will
examine the The importance of recent political issues of Pakistan and macroeconomic
events of trade partner countries on return and volatility of KSE 100 index will be
examined. We shall also see the impact of these events to identify the significant
difference between positive and negative volatility. This study will help investors to
make a decision about hold-on and drawback their investment.

1.3.1.4. Objective of study


Following are the objectives of this study;

Impact of Political issues on KSE 100 indexes


Impact of Macroeconomic events of trade partner countries on KSE 100 indexes
Is there any significant difference between positive and negative volatility?

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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

2.2.1. Literature Review Formatted: Outline numbered + Level: 2 + Numbering


Style: 1, 2, 3, + Start at: 1 + Alignment: Left +
Aligned at: 0.25" + Indent at: 0.55"
Karachi stock exchange was founded in 1947. KSE is counted as one of Asian oldest
and largest Pakistan stock exchange. Now KSE absorbs in Pakistan stock exchange
with Islamabad stock exchange and Lahore stock exchange. In 2014, Bloomberg
ranked it as 3rd best performing stock among top ten in world. Stock market is entity
where listed shares of public companies are exchange with money. It provide financial
support to companies to grow up. Stock exchange plays mediate role between sellers
and buyers. Performance of stock exchange may effected by various local events like
political instability, terrorist activities, energy crises, and religious sects offense. As
(Mehmood, 2014)explained political stability plays key role in the performance of
stock exchange as volatility in KSE 100 index occurs due the political events
occurrence. In spite of restriction of war on terrorism especially in Asian countries,
have macro-economic issues in capital market. Pakistan is a main victim of terrorism
so as a result they have economic insecurity and disturbance issues. Terrorism activities
form Pakistan religious exposures, political and specific group of sect has evoke the
attention of media, crucial harm of public and private equity and inevitable influence
on worldwide equity markets. Due to alliance on war on terror Pakistan equity market
badly affected by these activities. (Hussain, 2009) Focus on study the link between
stock market return and trade quantity during the period of 2008 to 2009 with the help
of root test and time series analysis. They found continuous relation among Karachi
stock volatility, trading volume and stock market return. They also point out massive
volatility in stock return due to fluctuation in expected return on the base of pre and
post era of Pervez Musharraf. Political events influence on price of stock which cause
of constructive or distractive change in stock return and trade volume. It also effect by
magnitude of event.

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 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.

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.

(Khan, 2014)Interrogate that macro-economic events (inflation, monetary and fiscal


policies) have note able impact on stock market. Their study shows that interest rate
and government income have invers relation on stock exchange of Pakistan. While
government expense and inflation rate have direct relation with stock exchange of
Pakistan. (Elena Fedorovaa, 2014) Examined the impact of macroeconomic news of
Europe on TEVICS (Turkey, Egypt, Vietnam, Indonesia, Colombia, and South Africa)
stock exchanges.

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.

2.1.2.2. Theoretical Framework: Formatted: Outline numbered + Level: 2 + Aligned at:


0.25" + Indent at: 0.55"

Political Issues
Of Pakistan
Stock exchange

(KSE 100 index)


Macro-economic
Events of trade
Partner countries

2.2.2.3. Hypothesis Formatted: Outline numbered + Level: 2 + Aligned at:


0.25" + Indent at: 0.55"
H1; There is significance impact of political issues on KSE-100 returns.

H2; There is significance impact of political issues on volatility of KSE100.

H3; There is significance impact of macro-economic event on KSE-100 returns.

H4; There is significance impact of macro-economic event on KSE-100 volatility of


KSE100.

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Chapter 3 Formatted: Heading 1

3.3.1. Methodology Formatted: Outline numbered + Level: 1 + Aligned at:


0" + Indent at: 0.25"

3.1.3.1.1 Data description Formatted: Outline numbered + Level: 2 + Start at: 1


+ Alignment: Left + Aligned at: 0.25" + Indent at:
In this study, nature of data will be quantitative as well as qualitative. Stock return data
nature is quantitative while data nature about event studies will be qualitative.

Impact of events on stock return is calculated by introducing dummy variable as


follows:

3.1.2 Political Issues of Pakistan Formatted: Heading 3, Outline numbered + Level: 3 +


Aligned at: 0.5" + Indent at: 0.85"
Benazir Bhutto Assassination:

DB= 1 When event exist, Otherwise 0

Description: Benazir Bhutto was assassinated in December 27, 2007. DB= 1 is used
at that day and 0 for pre and post days

Salman Taseer assassination:

Ds= 1 When event exist

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:

Dsi= 1 When event exist

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.

Panama papers news series:

Dp = 1 When event exist

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.

Dpr = 1 When event exist

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.

Dc = 1 When event exist

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.

Dcj= 1 When event exist

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:

Dbr = 1 When event exist

Otherwise 0

Description: decision of Brexit occur on June 23, 2016.

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.

Turkish Army try to take over:

Dt= 1 When event exist

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

OLS Regression and Volatile Data


OLS is used to determine the relationship between two variables. One variable is
dependent and other is independent variable. Mainly, linear regression is used to check
the impact of independent variable on dependent variable.

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.

3.1.2.3.1.4 Stock Returns Formatted: Outline numbered + Level: 3 + Start at: 1


+ Alignment: Left + Aligned at: 0.5" + Indent at: 0.85"
To analyze data, we take daily closing price of KSE (100 index) to calculate returns

Returns are calculated by

Rt = log CPt - log CPt-1 Equation 1

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.

3.1.5.3.1.7. LM ARCH TEST Formatted: Outline numbered + Level: 3 + Start at: 1


+ Alignment: Left + Aligned at: 0.5" + Indent at: 0.85"
Basically LM ARCH test is used in this study to check the ARCH effect. If there is
ARCH effect then ARCH and GARCH models to captured LM ARCH test.

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.

ARCH Model estimate by


2
= + =1 1 Equation 2

GARCH Model estimate by



2
= + =1 1 +=1 Equation 3
Chapter 4 Formatted: Heading 1

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:

Unit Root Test

Assumption of Unit root test is:

Ho; Unit Root

H1; Stationary

Table 1 Unit Root Test


Unit Root Test Formatted Table
t-Statistic Probability
Augmented Dickey-Fuller test statistic -30.095 0.000
Test critical values: 1% level -3.432
5% level -2.862
10% level -2.567

In table, t-statistics column shows critical points with level of significance.

Figure 1 Critical point

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.

15 | P a g e
But as shown in graph there is fluctuations in return.

Figure 2 KSE 100 Index Return


0.04

0.02 KSE 100 Return


0
68

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

H0; There is no ARACH effect

H1; There is ARACH effect

Table 2 LM-ARCH Test


LM-ARCH Test Formatted Table

R-squared 0.134 Mean dependent 0.0001


Adjusted R-squared 0.1336 S.D.variance
dependent 0.0003
Sum squared 0.0002 variance (F-
Probability 0.000
residual
F-statistic 190.236 statistic)

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.

Table 3 ARCH/GARCH and TARCH Model with Lagged Value 1


Mean Equation
Variable coefficient Std. Error Z-Static probability
@SQRT(GARCH) 0.342 0.059 5.751 0.000
C -0.004 0.0004 -8.742 0.000
AR(1) 0.146 0.024 6.531 0.000
Variance Equation
C 5.62E-06 6.01E-07 9.362 0.000
RESID(-1)^2 0.102 0.013 7.706 0.000
RESID(-1)^2*(RESID(-1)<0) 0.217 0.024 8.886 0.000
GARCH(-1) 0.763 0.012 60.663 0.000

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.

Again LM ARCH test is applied to check ARCH effect.

Table 4 LM-ARCH Test


Heteroskedasticity Test: ARCH Formatted Table

F-statistic 7.699 Probability 0.0056


F(1,2452)

Observed R- 7.6813
Squared

17 | P a g e
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

Table 5 ARCH/GARCH and TARCH Model with Lagged Value 2


Mean Equation Formatted Table
Variable coefficient Std. Error Z-Static probability
@SQRT(GARCH) 0.328 0.059 5.541 0.0000
C -0.004 0.0004 -8.538 0.0000
AR(1) 0.151 0.023 6.474 0.0000
Variance Equation
C 3.46E-06 4.41E-07 7.862 0.000
RESID(-1)^2 0.208 0.028 7.392 0.000
RESID(-1)^2*(RESID(-1)<0) 0.170 0.022 7.494 0.000
RESID(-2)^2 -0.148 0.026 -5.522 0.000
GARCH(-1) 0.839 0.013 63.298 0.000

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.

Table 6 LM-ARCH Test


Heteroskedasticity Test: ARCH Formatted Table

F-statistic 0.319 Probability F(1,2452) 0.571

Observed R-Squared 0.319


After this LM ARCH test is applied to check if there still ARCH effect and last table
prob. F 0.5718>10% shows that there is no ARCH effect. So, finally captured ARCH
Effect. Now Model is finalized for studying the variable.

Table 7 ARCH/GARCH and TARCH Model


Mean Equation Formatted Table
Variable coefficient Std. Error Z-Static probability
GARCH) 10.153 2.193 4.628 0.0000
C -0.002 0.0002 -9.423 0.0000
DTA -0.007 0.038 -0.019 0.984
MQM Issues -0.001 0.005 -0.237 0.812
AR(1) -0.844 0.025 -32.810 0.000
AR(2) 0.200 0.028 7.094 0.000
AR(3) 0.054 0.026 2.030 0.042
AR(4) 0.032 0.026 1.218 0.223
AR(5) 0.036 0.020 1.767 0.077
MA(1) 0.988 0.009 99.68 0.000
Variance Equation
C 3.94E-06 5.67E-07 6.951 0.000
RESID(-1)^2 0.196 0.028 6.781 0.000
RESID(- 0.188 0.024 7.570 0.000
1)^2*(RESID(-1)<0)
RESID(-2)^2 -0.138 0.027 -5.110 0.000
GARCH(-1) 0.833 0.013 59.856 0.000
Sit-in-Protest(DSIP) 0.0003 0.0001 2.602 0.009
DCPEC -8.24E-07 4.28E-07 -1.925 0.054
DBBA 0.0002 7.54E-05 -3.731 0.0002
Brexit Decision 0.0001 9.54E-05 1.288 0.197
(DBR)

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.

Table 8 LM-ARCH Test


Heteroskedasticity Test: ARCH Formatted Table

F-statistic 0.4114 Probability F(1,2452) 0.521

Observed R- 0.4117
Squared

19 | P a g e
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

5.5.1 Conclusion Formatted: Outline numbered + Level: 1 + Start at: 1


+ Alignment: Left + Aligned at: 0" + Indent at: 0.25"

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.

21 | P a g e
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