The Response of Karachi Stock Exchange to Nuclear Detonation

Abstract

Stock markets are highly reactive to internal and external developments. News of major events take no time to impact, the Stock Exchange that quite often serves as a barometer of the good and bad for the market. The importance of particular events and their effect on the stock market has been a subject of study in financial literature. Such studies attempt to assess the extent to which stock markets’ performance stray’s from the normal around the time of the occurrence of subject events. The stock market crash in the USA of October 1987 and related crash in the Far East later in January 1998 led to several studies of the event. On October 14, 1987, the US stock market began the steepest decline of its history, culminating in the crash of October 19, when the Dow Jones Industrial Average fell 508 points (22.6 percent). Certain aspects of the event of Black Monday as it is called emphasised the need for research to explore what fundamental economic factors triggered the large decline and the institutional and structural factors that were inherent in the trading strategies of investors. Michell and Netter (1989) have presented evidence that a tax bill containing anti takeover provision proposed by the U.S. House Ways and Means Committee of Oct. 13, 1987 was the economic event that triggered the October 19 crash. Other events and economic conditions during October 14–16 have been cited in the literature including higher than expected trade deficits, rising interest rate and increased worries about the government deficit and fear of inflation by many studies. Certain trading strategies such as index arbitrage and portfolio insurance has been cited by the Report of Presidential Task Force (1988). Roll (1988) has argued the crash did not begin in US since many other world markets experienced a severe decline on October 19 before US markets opened.