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

Abstract

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