nep-isf New Economics Papers
on Islamic Finance
Issue of 2022‒09‒19
two papers chosen by

  1. An Event Based Analysis of Stock Return and Political Uncertainty in Pakistan: Revisited By Audi, Marc; Sulehri, Fiaz Ahmad; Ali, Amjad; Al-Masri, Razan
  2. Macrofinancial determinants of default probability using copula: A case study of Indonesian banks By Maulana Harris Muhajir

  1. By: Audi, Marc; Sulehri, Fiaz Ahmad; Ali, Amjad; Al-Masri, Razan
    Abstract: This study examines the impact of political events on the Pakistan Stock Exchange with the help of larger data set, the stock market of Pakistan which is considered the top-performing market in the region has suffered as well as foreign investors are reluctant to invest in Pakistan stock markets due to uncertainty caused by political instability. Pakistan is struggling against many problems; political instability is a significant problem due to which the economic growth of the country is being hindered and the confidence of the investors has been shaken. A total of 66 political events were considered in the study out of which 33 events were coded as positive and the other 33 were deemed negative. The first-day abnormal return, five-day cumulative abnormal return, and ten-day cumulative return were calculated for all of the events. The political events were analyzed by segregating these into Pre-Musharraf, Musharraf, and Post-Musharraf eras and also on the bases of their category. This study finds evidence that political events affect the Pakistan Stock Exchange, but their impact is different considering the economic and political implications of these events. Certain events had a stronger impact on the stock market like the takeover of Musharraf, suspension of the chief justice, and assassination of Benazir Bhutto. Political events provided more consistent results where elections yield positive stock returns and the selection of prime minister yields negative stock returns after elections. Overall, this study lays the foundation to make further explorations into the phenomenon of uncertainty caused by political events in relevance to stock markets in Pakistan.
    Keywords: Stock Return, Political instability
    JEL: G24 P16
    Date: 2022
  2. By: Maulana Harris Muhajir (Neoma Business School)
    Abstract: In the aftermath of the global financial crisis of 2008, macrofinancial linkages have gained more attention from policymakers as primary issues of financial system stability. A clearer understanding of probability of default (PD) drivers may help predict if a bank will default on its portfolio liabilities. This presentation develops a method to assess a bank's PD based on a multivariate copula distribution to capture nonlinear relationships between variables with complex data structures. Then we use the generalized method of moments (GMM) to observe the relationship between PD to bank performance (bank-specific indicators) and the macroeconomic indicators. Our findings illustrate some critical links between PD and macroeconomic environments. For example, empirical evidence suggests that bank-specific indicators such as the CET 1 ratio, inefficiency ratio, and deposit ratio appear to be negatively and statistically significant to a bank's PD. When we examined the structural and macroeconomic variables, we found that the policy rate, the real exchange rate, economic growth, and the unemployment rate may reduce the PD. We also found that central state-owned banks tend to have a higher risk than other bank groups and that regional state-owned banks in the central region have the greatest likelihood of default.
    Date: 2022–08–11

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