Stock Market Reaction to Good and Bad Political News

Abstract

The purpose of this study is to analyse the consequence of political news on stock market returns and hence its volatility. For this purpose we split the political news into two categories (good and bad news). We used a univariate asymmetric GARCH model, to gauge the impact of political news on returns and volatility. Our results show that good news has a positive impact on the returns of the KSE100 index and also decreases the volatility. On the other hand, bad political news has a negative influence on the returns (decreases the returns) and increases the volatility (positive effect). Further, our results also confirm that bad news has a stronger effect (almost double) on the volatility than good news. Most of the sectors are also affected by the good and bad news in the same way as KSE100 index. We also find that the results of a few sectors (oil and gas, financial, health care) are not statistically significantly in response to good and bad political news, indicating that this type of news does not affect the returns or volatility. Our results show that the sectors which respond more towards good news have lower beta, suggesting variance moves quickly through the time.