Terrorism and Trading: Differential Equity and Bond Market Responses During Violent Elections

Abstract

Equity market investors gauge future corporate profits and sell shares when negative news announcements threaten future earnings. Comparatively, sovereign bonds sell off when economic conditions darken, and bond yields rise accordingly. Together, stock and bond markets amount to an intricate crowd-sourcing mechanism for acting upon perceived changes in, among other things, political risk. Frontier financial markets present particularly esoteric market information systems, and elections in frontier markets present a particularly fraught opportunity for study. Using a robust data set on electoral violence, this chapter assesses financial market responses to reports of electoral violence during the 2013 general elections in Pakistan. It will contribute to wider interdisciplinary discussions of political risk by offering constructs from finance which may clarify perceptions of, and responses to, civil strife in frontier economies during discrete time periods.