From Chaos to Opportunity: Can Investors Make Abnormal Profit During Political & Economic Uncertainty? Evidence From Pakistan Stock Exchange

Abstract

The objective of this study is to examine whether investors in the Pakistan Stock Exchange react rationally or emotionally during significant political and non-political events. The proxy for the market returns in the study is the daily returns of KSE-100 index and the study covers the period of 2014 to 2024. Using the mean-adjusted return model and event study methodology, this research explores the debate around market efficiency, particularly in the context of political and economic uncertainty, by analyzing the market's response to twelve major events including the Operation Zarb-e-Azb (2014), the Peshawar School Attack (2014), the Panama Papers Leak (2016), Nawaz Sharif’s disqualification (2017), FATF Grey Listing (2018), General Elections (2018), Azadi March (2019), Covid-19 lockdown (2020), the Ouster of Imran Khan (2022), the Return of Nawaz Sharif (2023), the Imprisonment of Imran Khan (2023), and the General Elections (2024). Previous studies focus solely on political uncertainty but this study is unique as it simultaneously examines both political and non-political shocks, to provide a better understanding of investor behaviour in Pakistan. The results show that seven events had a statistically significant impact on Pakistan stock market returns, including the General Elections 2024, General Elections 2018, Nawaz Sharif’s Disqualification, Azadi March, Imran Khan’s Imprisonment, Nawaz Sharif’s Return to Power, and the Covid-19 Lockdown leading to noticeable market reactions. In contrast, other events exhibited either temporary effects or no significant impact, suggesting that the stock market absorbs most political and economic shocks efficiently. These findings contribute to the capital market literature in Pakistan by offering empirical insights into how the PSX responds to uncertainty, reinforcing the notion that while the market normalizes over time, unexpected and critical events can disrupt investor sentiment in the short run.