The Role Of Political Factors On Determining Return Volatility : Evidence From Nonlinear Panel Data Analysis

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“Role of Political Factors in Determining Return Volatility: evidence from nonlinear panel data analysis” 1. Problem Background: Political factors and macroeconomic indicators have earned an ever-increasing academic and public attention in influencing the financial health of a country since last few decades. The stock market performance is not an exception. For instance, two major political events, the ‘9/11 attack on the USA’ of 2001 and the ‘Arab spring movement’ in 2011 had down-turned the stock market performance markedly, signalling the compelled importance of investigating the impact of political conditions on stock market activities. Political instability, in a broad context, can be defined as follows: it is the sudden changes to…show more content…
Obviously, there is no straightforward answer, yet the impact of such chaos on the investment decisions of firms or individual investors cannot be ruled out. On one hand, changes in political situation may influence to alter the investor expectations on equity price changes in near future; some risk-averse investors would like to use ‘wait-and-see approach’ during a political turmoil, by anticipating a settle down in the near future. On the other hand, some investors may decide to go forward to sell their stocks or avoid buying new stocks, perhaps before the market collapses more. As these shocks are exogenous and cannot be controlled by the economic forces or agents, arisen uncertainty may prevail in the market for some time periods. However, it should be noted that though it is often marked as a risk, harmful or a negative influence, the impact of political factors may depend on the market size, level as well as the degree of significance of the political factor. For example, an uncertainty created by a continuous labour union strike may be faded when it is called off. On contrast, if the tension occurs due to a sudden military ‘take-over’, the uncertainty could prevail for sometimes. With the frequent ‘political shocks’ occurred all over the world and their significant
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