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Impact of Opr Zarb e Azb on Stock Market

This study was undertaken to analyze the impact of War Zarb e Azab (officially announced
on 15 Jun 2014) on Pakistans largest stock exchange market KSE 100. For this purpose we
use Event study methodology. Results show that war have negative impact on stock
exchange market. In this project we ascertained at which degree kse100 shows reaction
against a military operation named opt Zarb e Azb which was started on 15 th of june 2014. To
find out true results we took data of past 3 years of kse100 and then with the help of two
tailed t-statistic and CAAR method. It figured out negative impact of military operation on
Karachi stock market. At the end possible reasons of this negative result are defined and
some suggestions for further researches in future.

If we throw some light on history we would came to know that almost each phase of history
had experienced some sort of war experiences. And wars always had significant impact on
economic conditions of involved parties or countries either we talk about national level wars
or civil wars. Similarly terrorism activities and antigovernment groups also had been in
existence in different forms in history. When we talk about past 15 to 18 years, many
countries have been facing extreme level of terrorist attacks including Pakistan, Afghanistan,
India, Iraq, Sham and even USA. After 9/11 attacks several military operations have been
launched in different countries on the name of war on terror. Pakistani Arm forces have been
fighting against terrorists since a long time. Unfortunately Pakistan is targeted by many
strong terrorist groups e.g. Tehreek.e.Taliban, Al qaida, Haqani group and many others.
Some of them belongs to Pakistan and some are controlled from other countries. After
allowing supplies to NETO forces through Pakistan, TTP attacked Pakistans public places,
schools, mosques, police and army many times. Thousands of civilians and others have been

died in these attacks. Pak Army have accomplished many operations against terrorists. In
2013 when Muslim league Nawaz came into power, Pak government started table talk with
representatives of TTP to stop these attacks and solve out issue. But after some gap TTP
again stood liable for terror activity in Pakistan and all table talk got in vain. In this sequence
after failure of negotiations with TTP, Pak government ordered to launch a comprehensive
operation to flush out all local and foreign terrorists hidden in North Waziristan. Army was
already prepared for such type of operation so it was started successfully on 15thjune 2014.
People from those areas were transferred to other places till the operation get complete. Such
big military operation must have been effected country from many aspect. Pakistans
economy would must be effected by starting such big operation. If we want to see reaction of
different sectors of economy to this military operation stock exchange index would be the
best suited variable to study. Karachi stock exchange is the major stock market in the
country. And kse100 covers all top companies and listed companies from all sectors. So In
this article we tried to find what impact this operation had on Karachi stock exchange in
short run. KSE is the largest stock market in Pakistan so we can use it as representative of
economy. In past studies it is revealed that on the day when such event occurred most of
markets went down and kept decreasing behavior for some time but after it they started
getting up day by day.
Many researchers have been conducted researches about military conflicts and stock market
behavior considering different countries and most of them have found a negative impact of
war on stock markets during the initial time period of conflicts. In past studies it is revealed
that on the day when such event occurred most of markets went down and kept decreasing
behavior for some time but after it they started getting up day by day. Leigh, Wolfers and
Zitzewitz(2003) said when we Analyzed option prices, it is found that in different pricing
range scenario the large estimated effects are shown - a 70 percent probability that it will
lead to market declines of 0 to 15 percent, a 20 percent chance of 15 to 30 percent declines,
and incase of 30% excess there will be risk of 10% decrease. This research was conducted
for Iraq war. Wars not just impose high costs on the domestic economy but they also impacts
on the minds of investots. Wars, both internal and external are destructive of human lives and
economic infrastructure. Volatility is increased because of wars. They also undermine the

political control of the state, threatening its institutions of all sectors including financial
sectors, the security of property rights, and the rule of law. Moreover, internal wars introduce
too much uncertainty into the economic environment, making both (public and private)
riskier e.g operation zarb.e.azb in Pakistan. War can impact economy of country through
different channels. To which extend internal war will impact on economy it depends upon
how much costly it would be. And what is the mechanism through which civil war
negatively effects on country economy. The theory which supports this study is black swan
theory, which was introduced by Nassim Nicholas Taleb in his book Fooled by
Randomness published in 2001. This theory talks about how unexpected and sudden events
impacts on economy and financial markets. Now a days, the researchers are focusing on
reaction of stock markets on indulging a country in war, as stocks are one of the fundamental
and easily quantifiable indicator of changes occurring in the economic activity. This research
will ascertain the degree to which KSE 100 reacted when Operation Zarb.e.azb launched.
Like other countries Pakistan also facing problem of black swan events so this study
basically investigate the effect of wars on stock market and how it change the decision
making of investors and to which extent. No doubt many other researchers have studied this
topic e.g. Syria war eigh, Wolfers and Zitzewitz(2003) for American civil war, Iraq war and
some other wars worldwide. But no any research have been conducted for Pakistans internal
war against terrorist. So first time in context of Pakistan this type of study has been made.
This paper is organized in following way: In section 2 all possible relevant studies
reviewed, section 3 talks about the research methodology and models. Section 4 deals
with results and whole paper is concluded in section 5.

Literature review:
It is commonly known fact that international markets show reaction in form of return and
volatility, instantly to major war events. But across the world it varies that with which timing
and with which attitude, volatility and returns of stock market get changed. If their effect is
just limited to integrated markets ( Nikkinen et al., 2008 ). That topic has been very popular
regarding major war events in long term effects of political instability and their impact on
fluctuations of financial markets (Fernandez, 2008). The impact of major war events on

stock markets getting more and more attention of empirical finance literature (Amihud and
Wohl, 2004; Chen and Siems, 2004; Athanassiou et al., 2006). Events such as wars, armed
conflicts, military operations, terrorist activities and unexpected happenings have significant
impact on bonds and share prices (Chen and Siems (2004)). War or governmental or political
crisis and other financial shocks can effect risk and returns of the share markets by creating
volatility and can make an impact on investment decisions and on pricing of shares and
portfolio allocation as well (Amihud and Wohl, 2004; Rigobon and Sack, 2005).
Malliaris and Urrutia (1995) finds that stock markets responded for Persian Gulf conflict in
1991and their analysis resulted that every countrys stock market got affected in proportion
to their oil imports. Athanassiou et al., (2006) analyzed about the impact of Greek and
Turkish conflict on Athens stock market by the help of GARCH family model. They
examined that armed conflict between these two countries affected Athens stock market
Iraq war is one of the major war event which made a great impact on stock markets and
economies in region. Iraq war also created financial, political and regional risks in all over
the world and specially in middle eastern region (Rigobon and Sack, 2005; Nell and
Semmler,2007; Richardson, 2003; Leigh et al., 2009). War in Iraq had decreased capacity of
oil production globally by creating instability in eastern region and investment too, said by
Salameh (2008). Shachmurove (2003) argues that the neighbor countries of Iraq faced
uncertainty on a larger level and they faced risk and depression on many aspects of economy
on national and international level. One more work on this topic is the research of Leippold
and Lohre (2010). A sample of 16 institutes were taken and examined depression from year
1987 to 2007 and they figured out a great level of depression in the year 2003 because of
Iraq war.
The majority of these studies resulted that the financial markets around the world have
reacted to major war events in the last 20 years. Moreover, many domestic and global events
have been investigated in the past literature. This research paper contributes to the literature
in different ways. First, nobody has make research about the impact of any internal war on
Pakistan stock market. Second, no literature has been examined impact of such event which
is in process these days. This research will fill the gap in the literature.

On the basis of above studies this hypothesis is developed:

H1 : Internal military conflicts has significant impact on stock market (using KSE-100

Data and methodology:

Data used in this study consist of daily Karachi Stock Exchange 100 index starting from
2013 to 2015. This data was taken from KSE official website. Event study technique has
been used in the study to analyze this relationship between operation zarb e azb and Karachi
stock exchange. This technique is used to analyze the impact of any good or bad event on
some specific variable e.g. stock index. We took 505 observations approximately these
values are 252 after and 252 before the event. Whereas the sources of data were primarily
based on secondary data. However the index on public holidays and non-trading days is not
used while studying. We applied test just taking ending values of index. First of all daily
index returns are calculated by using following common formula:
Rt =log

KSE t1

And then all other calculations have done on these KSE-100 returns. To check impact of
operation we used window technique and developed 7 days pre-event and post- event
windows. After that we calculated expected returns of pre and post-event window using 252
pre-event actual returns of KSE-100. To calculate expected returns of windows following
formula is being used:
E(r ) n= AVG ( R t|Rn )

E(r ) n+1 =AVG ( Rt +1|R n )

As these formulas are telling we will find expected return of specific date in window by
averaging all returns before the date and we will move one date forward we will start
averaging on date later from the first date so expected returns would be as accurate as
possible. By this method we calculated expected return of all days in pre and post-window.
Now we had to calculate abnormal returns for whole window abnormal returns are
calculated by subtracting expected returns from actual returns formula is given below for

better understanding:
A (r )t =Rt Er t
Next, to check significant level of our window we used CAAR technique to implement this
method we compared t-test statistic first with AR(abnormal return) then with
CAR(cumulative abnormal return) and in the end with CAAR(cumulative average abnormal
return). CAAR is calculated with this formula:
To perform t-test we use this formula
After that to evaluate t-test score we used two tailed test because our hypothesis is non
directional. With significance level of .05 and confidence level of 95%.

-1.96 SEM

+1.96 SEM

And then figured out significance level for possible rejection of null hypothesis using this
formula :

=IF (( tscore n )>=1.96,"SIG", IF ( tscore n <=-1.96,"SIG","INSIG"))

Now we are able to find either values in post-window are significant or not.

Graphical representation:
Graph 1:

For graphical representation we use line graph. This graph shows a huge decline in index just
after the officially announcement of Zarb e Azab.
Table 1:

Table 2:

We perform CAAR test to check our hypothesis. 16 Jun 2014 is the event date and we take
seven days after and seven days before the event.

Section IV
Interpretation of results:

Ope Zarb e Azab


41796 41800 41802 41806 41808 41810 41814
41795 41799 41801 41803 41807 41809 41813 41815


Section V
This study was conducted to analyze the negative affect of war on Karachi
stock market keeping in view the naseemtalibs black swan theory. Finally after results and
discussion this theory prove right in Pakistan. There can be many other causes but War or
any bad event negatively affect stock market. There are many reasons why a war event hit
stock market in a bad way. One imperative reason is that both internal and external war
create uncertainty in country and in economic future as well. So considering this share prices
of every company shows reaction in someway and because of it overall kse100 index too.
Stock holders may try to sale there shares and get rid of risky future of their investment in
reaction prices of shares get dampen.

This topic is not as much researched in Pakistan so there is a need that our students and
researchers come forward for their participation. Pakistan is a country which faces wars
often and military operations. And there are many other unpredicted events which can hit
economy as like terrorist attacks, therefor on this subject much more research is needed. We
just figured out operation zarb e azb and its impact on kse100 but there are many other
operations launched more researches could be conducted on them.












This study is analyzing the impact of Operation Zarb e Azab on Karachi stock exchange but
there are also many other events which affect stock market and there are some other options
to measure impact on stock market like Islamabad stock market or kse30.

References :