Political Risks and Performance of Stock Markets Case of South Asia

Abstract

This study tried to investigate whether a strong political system can affect the performance of the stock market in the country. This study is a long run panel series which is not based on any news or events rather it is based on the long run time series data covering different years and government regimes in the covered region. This study covered the four major economies in South Asia namely India, Pakistan, Sri Lanka and Bangladesh. The political system ratings were taken from the International Country Risk Guide (ICRG) Political Risk Index. This study covers the time period 1984 to 2012 .We ran three different panel regressions. All the three models that we regressed in this study confirm that there is a strong positive relationship between political stability in the country and the performance of its stock exchange markets over a long run .The conclusion drawn from the result is that in order to make our financial system perform efficiently, we need to set our political home in order.