Market Reactions to Major Political Shocks and Recovery Dynamics in Pakistan: An Event Study of PSX Returns

Abstract

This research is aimed at verifying how different political events can affect Karachi stock exchange KSE 100 Index. To this effect, ten significant political events were studied within the study period of 2015 to 2025. They included Panama papers Leak, PM Nawaz Sharif Disqualification, Faizabad Sit-in Ends After Military-Brokered Agreement 2017, General Elections 2018, Azadi March 2019, National Assembly Dissolution and Supreme Court Intervention, April 2022, No-Confidence Motion & Removal of Imran Khan, April 2022, May 9, Riots, Pakistani General Election 2024, Shehbaz Sharif as PM 2025. Political instability is also another common characteristic of macroeconomic climate in Pakistan, although little empirical data exists regarding the repeated political shock causing any effect on market behaviour over a long period. To fill this gap, the study will use the event study methodology whereby it aims at establishing the direction, the magnitude and persistence of the market reactions to the chosen large political events. The results show that multiple political shocks produce statistically significant abnormal returns at event dates suggesting the increased sensitivity of investors to political uncertainty. In a substantial number of instances, cumulative abnormal returns may exceed daily abnormal returns, which indicates that market reaction is usually slow not immediate. The findings also indicate that the market responses are mainly short term based. Political shocks interfere with the performance of the market around the time of the occurrence of the event, but as time progresses, there is a statistical decrease in the abnormal returns, which denotes market stabilization and recovery. This pattern confirms the fact that the PSX assimilates political information over time and returns to normal level of performance which indicates semi strong form market efficiency. Altogether, the paper presents detailed evidence on the nature of the Pakistani Stock Exchange reactions to the systematic political shocks when the time horizon is quite long. The results provide valuable information to investors, policy makers and regulators. It shows the short-term weakness of the stock market in Pakistan but resilience of the market in the long run in case of political uncertainty.