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The impact of political regime changes on stock prices: the case of Egypt

The impact of political regime changes on stock prices: the case of Egypt PurposeOver a short interval of time (i.e. 2011-2014), Egypt has experienced tectonic political shifts, including the toppling of a long-entrenched dictator, two presidential elections, and a military coup. The purpose of this paper is to provide an analysis of the impact of such events on the country’s equity market behaviour, both in terms of returns and volatility.Design/methodology/approachThe data set is composed of daily stock index closing prices for the overall market and top eight most actively traded sectors. To assess the impact of the considered events on the market and sector returns, an event study approach is applied. On the other hand, a univariate VAR-EGARCH model is employed to explore whether, and to what extent, volatilities at the market and sector levels respond to such events.FindingsThe results suggest that political uncertainty has a profound impact on the risk-return profiles of almost all market sectors, with different degrees of intensity. By and large, the price and volatility effects are most pronounced in banks, financial services excluding banks and chemicals sectors, whilst food and beverages as well as construction and materials sectors are found to be the least responsive to these events. The 2013 military coup turns out to be the most pervasive event impinging on the market and sector-specific indices.Practical implicationsThe results have a number of practical implications that could be of interest to many parties involved. More specifically, with political dysfunction overshadowing business and investment activities in Egypt, genuine democratic reforms, which entail proper regard for human rights and the rule of law, must have the highest priority of policymakers, in order to secure a positive investment climate and to foster investor confidence. Furthermore, in tandem with considering other relevant factors, multinational companies need to have a thorough assessment of Egypt’s future political course and to develop more robust contingency plans to effectively combat potential threats generated by political vicissitudes.Originality/valueTo the author’s best knowledge, this study is the first attempt to empirically examine the price and volatility effects of the recent presidential events in Egypt, thereby contributing to the relevant literature in this area. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png International Journal of Emerging Markets Emerald Publishing

The impact of political regime changes on stock prices: the case of Egypt

International Journal of Emerging Markets , Volume 12 (3): 24 – Jul 17, 2017

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Publisher
Emerald Publishing
Copyright
Copyright © Emerald Group Publishing Limited
ISSN
1746-8809
DOI
10.1108/IJoEM-12-2015-0258
Publisher site
See Article on Publisher Site

Abstract

PurposeOver a short interval of time (i.e. 2011-2014), Egypt has experienced tectonic political shifts, including the toppling of a long-entrenched dictator, two presidential elections, and a military coup. The purpose of this paper is to provide an analysis of the impact of such events on the country’s equity market behaviour, both in terms of returns and volatility.Design/methodology/approachThe data set is composed of daily stock index closing prices for the overall market and top eight most actively traded sectors. To assess the impact of the considered events on the market and sector returns, an event study approach is applied. On the other hand, a univariate VAR-EGARCH model is employed to explore whether, and to what extent, volatilities at the market and sector levels respond to such events.FindingsThe results suggest that political uncertainty has a profound impact on the risk-return profiles of almost all market sectors, with different degrees of intensity. By and large, the price and volatility effects are most pronounced in banks, financial services excluding banks and chemicals sectors, whilst food and beverages as well as construction and materials sectors are found to be the least responsive to these events. The 2013 military coup turns out to be the most pervasive event impinging on the market and sector-specific indices.Practical implicationsThe results have a number of practical implications that could be of interest to many parties involved. More specifically, with political dysfunction overshadowing business and investment activities in Egypt, genuine democratic reforms, which entail proper regard for human rights and the rule of law, must have the highest priority of policymakers, in order to secure a positive investment climate and to foster investor confidence. Furthermore, in tandem with considering other relevant factors, multinational companies need to have a thorough assessment of Egypt’s future political course and to develop more robust contingency plans to effectively combat potential threats generated by political vicissitudes.Originality/valueTo the author’s best knowledge, this study is the first attempt to empirically examine the price and volatility effects of the recent presidential events in Egypt, thereby contributing to the relevant literature in this area.

Journal

International Journal of Emerging MarketsEmerald Publishing

Published: Jul 17, 2017

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