The Impact Of Lottery Demand On the Stock Market Through Political Transitions: A Case Study Of Pakistan (PSX).
DOI:
https://doi.org/10.63075/7206km61Abstract
This study examines the influence of political shocks on stock market performance during four primary election cycles. Quantile regression and portfolio sorting methodologies are employed to examine the impact of political uncertainty on stock returns, market volatility, and investor sentiment. The Fama-MacBeth cross-sectional regression is used to check for robustness. The results indicate that election years are associated with lower stock returns and higher volatility. The adverse effects were especially pronounced in 2008, when the global financial crisis heightened people's concerns about elections, leading to a further decline in the market. The study reveals that stocks exhibiting idiosyncratic volatility (IVOLT) and idiosyncratic skewness (ISKEN), also referred to as lottery-like stocks, tend to perform worse when there is a change in political leadership. This suggests that investors tend to avoid riskier assets and shift toward safer ones when uncertainty prevails. Stocks with very high one-day and five-day returns (MAXRET(1) and MAXRET(5)) do poorly when there is political uncertainty. This supports the idea that volatile stocks are more affected by election cycles. Momentum-based trading strategies also falter during political transitions, indicating that elections disrupt standard market dynamics and result in short-term price reversals. The research also shows that investors should reduce their exposure to high-risk, speculative stocks during election cycles and switch to assets that are liquid and fundamentally sound. This study contributes to the existing literature on political uncertainty and financial markets, offering valuable insights for portfolio management, risk assessment, and investment strategy in contexts of political instability. Subsequent research could be extended to other geopolitical areas to investigate the enduring impacts of political risk on financial stability.
