The relationship between political instability and stock market performance: An analysis of the MSCI index in the case of Pakistan (2024)

Zhiying Mai, Conceptualization, Data curation, Formal analysis, Funding acquisition, Investigation, Writing – original draft, Writing – review & editing,¹ Hassan Mujtaba Nawaz Saleem, Conceptualization, Methodology, Project administration, Software, Supervision, Writing – original draft,² and Muhammad Kamran, Conceptualization, Data curation, Formal analysis, Investigation^3,*

3.1 Data description and sample size

This study covers Pakistan in which peoples of the economy faced the political instability from the last many decades that has the impact on their economic development. Pakistan is selected as a sample due to the increase in the political instability from last two decades. Moreover, another reason of the selection of the Pakistan as a sample Pakistan has experienced significant political instability since its inception in 1947. The country has gone through numerous military coups, political assassinations, and changes in government, making it a compelling subject for studying the dynamics of political instability over time. To meet our objectives of the study, we used the 50 years data from 1971 to 2021 on an annual basis. These economy data is selected due to the involvement of the foreign affairs in the country’s political situation. Some external factors have control over the political background. The data of the MSCI indices of Pakistan are collected from the DataStream data base. The WGI indicators data is collected from the world bank data portal (https://info.worldbank.org/governance/wgi/). The Conceptual model developed on the basis of the previous theory and literature are given in the Fig 1. Moreover, the Table 1 shows the variable measurement.

3.2 Variables measurement

Econometric model of the study that used in the analysis are given,

It is very essential the checking of the accuracy of the results of the stock market performance that leads to financial performance of the economy through the Robust analysis. Robust analysis is also useful for the accuracy of the result by one type measures and that’s why we used the GDP as the measure of the financial performance that corelate with the Stock market performance of any economy. The Robustness analysis equation are given below,

The Ordinary Least Squares (OLS) method is a popular statistical technique used in business analysis to estimate the relationship between a dependent variable and one or more independent variables. OLS is commonly used in regression analysis to identify the strength and direction of the relationship between variables. In another study used OLS regression analysis to examine the relationship between ethical leadership and employee well-being [23]. Moreover, the OLS method has been widely used in business analysis to investigate various relationships and inform decision-making. Its versatility and ease of use have made it a popular technique among researchers and practitioners alike. Regression analysis is also a powerful tool for analyzing data and can be used to make predictions and forecast future trends. There have been numerous studies that have highlighted the usefulness of regression analysis in various fields, including finance, economics, and medicine. One recent study examined the relationship between economic growth and foreign direct investment (FDI) in the ASEAN region. The researchers used multiple regression analysis to analyze the data [24]. Another used regression analysis to examine the relationship between stock market returns and exchange rates in China [25]. In the field of medicine, a study used regression analysis to analyze data on patient satisfaction with healthcare services [26]. These studies demonstrate the usefulness of regression analysis in diagnosing the relationship between two or more variables in a range of fields. It allows researchers to identify significant relationships and make informed decisions based on data-driven insights. This study utilizes a quantitative methodology, analyzing time-series data on a key economic indicator, namely the Stock Market. To carry out this investigation, the study draws on data from the MSCI index and the Political Instability WGI indicators for Pakistan. The GMM method is used for robustness analysis. Generalized Method of Moments (GMM) is used for estimating parameters in econometric models and other statistical models. It is particularly useful when dealing with models that have endogenous variables and instruments to address issues related to omitted variable bias and measurement error. GMM is widely used in various fields, including economics, finance, and social sciences.

4.1 Descriptive statistics

Table 2 signifies descriptive statistics for our study for the data of Pakistan. The study model includes a total of 50observation for every variable. The table demonstrates that Corruption Control has a mean assessment of -0.937456 standard deviations of 0.13949 it is our independent variable. Whereas Government Effectiveness which is our independent variable has a mean of -0.619013and a standard deviation of 0.134657. In the same way, MCSI has a mean assessment of 2.6509and a standard deviation of 0.1542. Political stability has to mean assessment of -2.09038 and standard deviation of 0.550707. The rule of law has a mean assessment of -0.8172 and a standard deviation of 0.115192. Regularity Quality has a mean assessment of -0.6755 and a standard deviation of 0.123. Voice of Accountability has a mean assessment of -0.860523 and a standard deviation of -0.1736. Fig 2 shows the graphs of the value of the political stability and the other governance indicators.

4.2 Correlation matrix

In our correlation matrix Table 3, CC and GE has the correlation value of 0.2740 which is less than the standard of 0.80. It means that there is not at all correlation between CC and GE. In the same way correlation matrix, CC and MSCI has the correlation value of 0.2689 which is less than the standard 0.80. It means that there is no correlation between CC and MSCI. Similarly, CC and PS have a correlation value of -0.1569 which is less than our standard 0.80. It means that there is no correlation between CC and PS. Now correlation matrix CC and RL Duality has the correlation value 0.2155 which is less than the standard 0.80. It means that there is not at all correlation between CC and RL. In our Correlation matrix, CC and RQ has a correlation value of 0.1309 which is less than the standard of 0.80. It means that there is not at all a correlation between the CC and RQ. In the same way in our correlation matrix, CC and VA have the correlation value of -0.0811 which is less than the standard of 0.80. It means that nearby is no correlation between CC and VA. Similarly, in our correlation matrix GE and MSCI has the correlation value of -0.4518 which is less than the standard of 0.80. It means that there is no correlation matrix among GE and MSCI. Our correlation of matrix RL and RQ has the correlation value of 0.4051 which is less than the standard of 0.80. It means that there is no correlation between RL and RQ. In the same way, RQ and VA have the correlation value of 0.6207 which is greater than standard, but it is the dependent variable, and the Scholar runs the reliant on variables RL, RQ AND VA separately so there is no impact on it. In our Correlation matrix, VA and VA have the correlation value is 01 in which both variables are the dependent variable.

4.3 Results and findings

The R-Square and Adjusted R value is 0.3540 and 0.3271, respectively indicating the about 32% effect is represented by the selected variable in the model and more other variable has impact but they does not included in the study and their probability is significant at 1% indicating the estimation fitness. In our results related to Pakistan in Table 4, Government effectiveness has significant at 5% level of significant, it means that Government effectiveness (GE) has positive impact on the stock market of Pakistan and also indicating that the 1 unit increase in the government effectiveness will rise in the 0.131749 in the stock market prices. Moreover, when the government has effective policies then there is growth in the financial markets leads to prosperity in Pakistan. Moreover, Political stability (PS) has significant at 1% and positive coefficient, it means that Political stability play very important role in stock market performance. When the political stability rises then increase in the 0.24 in the stock market indices of Pakistan. Similarly, in our results Rules of law (RL) and Voice and Accountability has significant positive impact on the stock market and it indicate that the 1 increase in the rules of law by the government then there should be 0.9191 increase in the stock market index of Pakistan. Moreover, it also indicated that when complete law and order is followed by the government then there is increase in the stock market due to the investor confidence increases on the stock. However, voice and accountability findings is also significant, indicating that 1 increase in the voice and accountability or freedom of choice leads to rise in the stock market index by 0.1441.

4.4 Robustness analysis

The value of the R-Squared value of our model in Table 5 that is estimated is 0.499018 and has the p-value is 0.055381 that talks about the model fit. In our results on the Stock Market Performance taken as a proxy for the GDP then Control variables Has important positive impact on the Stock market performance at 1% level of the significant, it means that all the indicators of the world governance have positive impact on financial performance of the economy that hit the stock market performance. Our robust analysis result verifies the existing results of the MSCI indices taken as the proxy for the stock market performance leads to financial performance of the economy because the stock market of any economy is considering the barometer of the country that drives the economic activities.

In Table 6, the J-statistics value and its probability falls under significant region indicating the model fitness. Our results of the robustness shows that there is improvement in the findings as compared from the OLS methods. Control of the corruption in the regression method results are not significant but in the GMM method its relationship with the stock market performance is significant that indicated 1 point increase in the control of corruption within the country leads to 0.1892 in stock price due to significant positive impact of the control of the corruption on the stock market. Moreover, regulatory quality findings is not significant but in the GMM findings their results shows the significant and positive indicating that the regulatory quality of the governance has increase the stock market index.

4.5 Discussion

Our findings related to Pakistan demonstrate that Government effectiveness has a significant positive impact on the stock market of Pakistan at the 5% level of significance. This indicates that when the government implements effective policies, there is growth in the financial markets which leads to prosperity in Pakistan. There is a large body of literature exploring the relationship between government policies and stock market performance. Overall, the literature suggests that government policies can have a significant impact on the stock market, both positively and negatively. Some policies that are generally considered to be positive for the stock market include those that promote economic growth, such as investment in infrastructure and tax cuts for businesses. Other policies that can have a positive impact on the market include those that promote stability and predictability, such as a clear and consistent regulatory environment.

On the other hand, policies that are viewed as negative for the stock market include those that create uncertainty and volatility, such as sudden changes in regulations or trade policies. Government policies that increase taxes or impose new regulations on businesses can also have a negative impact on the stock market. It is important to note that the relationship between government policies and the stock market can be complex and nuanced, and there are many factors that can influence stock market performance. Other factors that can affect the stock market include economic indicators such as interest rates, inflation, and GDP growth, as well as global events such as natural disasters or geopolitical conflicts. Overall, while there is evidence to suggest that government policies can have an impact on the stock market, the relationship is not always straightforward and is subject to a variety of other influences.

Additionally, our results show that Political stability plays a crucial role in the stock market performance, with a significant positive coefficient at the 1% level of significance. This means that when political stability rises, there is a 0.24 increase in the stock market indices of Pakistan. In this way, our results are supported by different previous literature. There have been several studies examining the relationship between political stability and the stock market in Pakistan. One study conducted by [27] found that political stability has a positive impact on the stock market and in this way our findings are consisted with [27] findings. The study used quarterly data from 1997 to 2016 and employed the autoregressive distributed lag (ARDL) model to estimate the long-run and short-run relationship between political stability and the stock market. The results of the study showed that political stability has a significant positive impact on the stock market in both the short and long run. Our results are similar with the findings of [28] that investigated the impact of political instability on the stock market in Pakistan using monthly data from 2000 to 2016. The study used the ARDL approach to examine the long-run and short-run relationship between political instability and the stock market. The results indicated that political instability has a negative and significant impact on the stock market in Pakistan in both the short and long run. Similarly, a study by [29] examined the relationship between political instability and stock market returns in Pakistan using monthly data from 1997 to 2011. The study employed the Granger causality test and found a bi-directional causality between political instability and stock market returns, suggesting that political instability and stock market returns have a mutually reinforcing relationship. Overall, the previous study literature suggests that political stability is an important factor influencing the stock market performance in Pakistan. While some studies have found a positive impact of political stability on the stock market, others have reported a negative impact. There are several instances where political instability has led to a decline in Pakistan’s stock market. For example, in 2018, the country’s stock market witnessed a significant decline due to political uncertainty surrounding the general election.

Similarly, our findings reveal that Rules of law (RL) and Voice and Accountability also have a significant positive impact on the stock market, suggesting that when the government follows complete law and order, investor confidence increases, leading to an increase in the stock market. Research has suggested that good governance, as measured by the rule of law (RL) and voice and accountability (VA), may have a positive impact on stock market performance. Our results are similar to the study that found RL and VA were positively associated with stock market returns in a sample of emerging market economies [30]. The authors suggest that RL and VA may create a stable and predictable business environment, which can encourage investment and promote economic growth. Another study analyzed data from 31 emerging markets and developing economies and found that stronger RL was associated with higher stock market returns and lower volatility [31] and in this way our study shows similar findings. Moreover, [31] also suggest that RL helps to promote transparency, accountability, and investor protection, which can increase investor confidence and encourage investment. A more recent study analyzed data from 63 countries and found a positive relationship between RL, VA, and stock market performance. [32] that validate our findings in this study through a justification. They suggest that RL and VA may lead to improved corporate governance, which can increase investor confidence and improve stock market performance. It is important to note that the relationship between RL, VA, and stock market performance may be influenced by a variety of other factors, such as economic conditions, political stability, and global events.

S1 Data

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S2 Data

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20 Jul 2023

PONE-D-23-18890The Relationship between Political instability and Stock market Performance: An Analysis of the MSCI Index in the Case of Pakistan.PLOS ONE

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Reviewer #1:Dear Sir,

After review of the paper titled "The Relationship between Political instability and Stock market Performance: An Analysis of the MSCI Index in the Case of Pakistan" which submitted to the PLOS ONE Journal, I think that this paper is suitable for publication in this Journal but need several revisions such as:

- revise some grammatical mistakes in the paper

- Use the following references to improve the quality of this paper:

https://doi.org/10.1142/S2424786322500050

https://dx.doi.org/10.2139/ssrn.4280578

https://doi.org/10.1007/978-981-19-1036-4_3

https://doi.org/10.1007/978-981-19-1036-4_4

https://doi.org/10.1080/10971475.2021.1958453

https://doi.org/10.1108/PAR-09-2020-0170

- present the policy implications of this paper in the conclusion section

After that the authors made the suggested revisions, I think that editor can consider this paper for publication in the PLOS ONE Journal.

All the best

Reviewer #2:- What novelties did the authors offer?

- What makes it different from The Relationship between Political instability and Stock market Performance: An Analysis of the MSCI Index in other articles?

- What is unique about Pakistan as a case and locus?

- An abstract summarizes, usually in one paragraph of 300 words or less, the major aspects of the entire paper in a prescribed sequence that includes: 1) the overall purpose of the study and the research problem(s) you investigated; 2) the basic design of the study; 3) major findings or trends found as a result of your analysis; and, 4) a brief summary of your interpretations and conclusions.

- Please add state of the art, gap analysis, and purpose of the paper.

- Before explaining the aim of the study, you should first describe the state of the art and gap analysis. International insight is also needed.

- Please add citation on these sentences.

- The author must cite the article: https://journal.ppishk.org/index.php/jcgpp/article/view/80

- Presentation of the results of empirical findings will be more appropriate when accompanied by data visualization.

- The conclusion is intended to help the reader understand why your research should matter to them after they have finished reading the paper. A conclusion is not merely a summary of the main topics covered or a re-statement of your research problem, but a synthesis of key points and, if applicable, where you recommend new areas for future research. For most college-level research papers, one or two well-developed paragraphs is sufficient for a conclusion, although in some cases, more paragraphs may be required in summarizing key findings and their significance.

Reviewer #3:Authors need to revise the following points in detail.

The paper's introduction section is not well organized therefore not well written at all. Too much reference has been cited in the introduction section which makes the reading uninteresting. There is hardly any linking conjunction, adverbs, propositions used in the whole manuscript which makes the paper incoherent. It seems that some references have been picked up from difference sources and jumbled up together. It's also obsolete to use past tenses while stating a reference. There are no concluding sentences at the end of each paragraph of the introduction section. So, the introduction must be rewritten. The proof reading has not been done professionally. A lot of grammatical mistakes are also evident. The authors must clearly state why this study is important to conduct in the introduction section. The objective of the study is not mentioned in the introduction. The contribution of the study is very poorly stated in two sentences and shockingly understated and disorganized. It is utterly confusing the purpose of the literature mentioned in the introduction. Are they to mention the shortcomings of the existing literature or for mentioning the importance of conducting this study? The gap or shortcomings of the literature has not been mentioned anywhere in the literature review section. The authors continue to describe different studies but did not mention the gap in the literature. This section must be rewritten as well. It's really hard to understand what authors mean by mentioning these studies. The result and discussion section are very much disorganized. The authors should clearly state which studies are in line with their findings and which contradicts. The paper does not mention any theoretical or anecdotal evidences which actually justify the selection of the variables in the context of Pakistan's economy. The robustness of the results has not been checked. The robustness can be checked by changing model idealizations or changing background conditions.

Authors need to send the used data and do file/STATA codes to cross verify the examined results with the revised paper.

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Reviewer #3:No

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12 Sep 2023

The response to reviewer is attached in file separately for each reviewer

18 Sep 2023

The Relationship between Political instability and Stock market Performance: An Analysis of the MSCI Index in the Case of Pakistan.

PONE-D-23-18890R1

Dear Dr. Kamran,

We’re pleased to inform you that your manuscript has been judged scientifically suitable for publication and will be formally accepted for publication once it meets all outstanding technical requirements.

Within one week, you’ll receive an e-mail detailing the required amendments. When these have been addressed, you’ll receive a formal acceptance letter and your manuscript will be scheduled for publication.

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Kind regards,

Kittisak Jermsittiparsert, Ph.D.

Academic Editor

PLOS ONE

Additional Editor Comments (optional):

Reviewers' comments:

Reviewer's Responses to Questions

Comments to the Author

1. If the authors have adequately addressed your comments raised in a previous round of review and you feel that this manuscript is now acceptable for publication, you may indicate that here to bypass the “Comments to the Author” section, enter your conflict of interest statement in the “Confidential to Editor” section, and submit your "Accept" recommendation.

Reviewer #1:(No Response)

Reviewer #2:(No Response)

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2. Is the manuscript technically sound, and do the data support the conclusions?

The manuscript must describe a technically sound piece of scientific research with data that supports the conclusions. Experiments must have been conducted rigorously, with appropriate controls, replication, and sample sizes. The conclusions must be drawn appropriately based on the data presented.

Reviewer #1:Yes

Reviewer #2:Partly

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3. Has the statistical analysis been performed appropriately and rigorously?

Reviewer #1:Yes

Reviewer #2:Yes

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Reviewer #1:Yes

Reviewer #2:Yes

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Reviewer #1:Yes

Reviewer #2:Yes

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6. Review Comments to the Author

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Reviewer #1:Dear Sir,

After review of the Revised paper titled "The Relationship between Political instability and Stock market Performance: An Analysis of the MSCI Index in the Case of Pakistan" which submitted to the Plos One Journal, I think that this paper is suitable for publication in this Journal in the current form.

All the best

Reviewer #2:The author must cite the article for improve the international insight: https://journal.ppishk.org/index.php/jcgpp/article/view/80

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Reviewer #1:No

Reviewer #2:No

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10 Oct 2023

PONE-D-23-18890R1

The Relationship between Political instability and Stock market Performance: An Analysis of the MSCI Index in the Case of Pakistan.

Dear Dr. Kamran:

I'm pleased to inform you that your manuscript has been deemed suitable for publication in PLOS ONE. Congratulations! Your manuscript is now with our production department.

If your institution or institutions have a press office, please let them know about your upcoming paper now to help maximize its impact. If they'll be preparing press materials, please inform our press team within the next 48 hours. Your manuscript will remain under strict press embargo until 2 pm Eastern Time on the date of publication. For more information please contact gro.solp@sserpeno.

If we can help with anything else, please email us at gro.solp@enosolp.

Thank you for submitting your work to PLOS ONE and supporting open access.

Kind regards,

PLOS ONE Editorial Office Staff

on behalf of

Professor Kittisak Jermsittiparsert

Academic Editor

PLOS ONE