Geopolitical Conflicts and Stock Market Performance: Evidence from Pakistan

Abstract

The study examines the impact of geographical risk on the performance of stock market. The study used geographical risk as explanatory variable while inflation, interest rate and exchange rate were used as peripheral variables. The study used data of PSX-100 index companies for four years ranging from 2021-24. Multiple regression analysis was conducted to reach conclusion about the relationships of variables. Before starting the regression analysis, the data was tested for OLS assumption like multicollinearity for unbiased results. The results of the model indicate that the relationship between geopolitical risk and stock market performance is statistically significant and negative, suggesting that higher geopolitical risk reduces PSX returns. The results also show that inflation has a significant negative impact on stock market performance. For the other control variables, exchange rate exhibits a negative and statistically significant relationship with stock returns, while interest rate also has a negative relationship but this relationship is not statistically significant. The model has an R² of 0.62, indicating that 62% of the variation in stock market performance is explained by the independent and control variables included in the analysis.

Keywords: Geographical Risk, PSX 100 Index, Interest, Inflation, Exchange rate.