How terrorism and macroeconomic factors impact on returns: a case study of Karachi Stock Exchange

Abstract

espite limitation of 'War on Terror' in specific Asian countries, global economies are facing serious threats in their capital markets. As a front line state in War on Terror, Pakistan is facing economic instability and disquieting consequences. Recent emergence of religious, sectarian and politically induced terrorist factions has attracted dramatic focus of media, serious damages to public and private assets and unavoidably affected global equity markets. Due to central location of affected areas, equity markets of Pakistan are highly pretentious by consequences of War on Terror. This study examines the relationship between Terrorism and Macroeconomic factors (Interest Rate and Inflation) on Karachi Stock Exchange (KSE-100 Index) using daily basis data for Terrorism and monthly basis data for Macro-economic Factors from 1st July 2005 to 31st June 2010. Various statistical techniques are used include unit root Augmented Dickey Fuller test, Phillip Perron, Johansen's co-integration, Granger's causality test, ARCH, GARCH and GARCH-EVT. Findings of the study revealed co-integration between macroeconomic factors and KSE stock returns which demonstrate that largest equity market of Pakistan KSE-100 Index have negative relationship with Terrorism and causal relationship with interest rate; whereas, no relationship is found with inflation. Outcome of the study explored Cointegration and a long-term relationship among study variables.