Impact of key political and security shocks on the stock market returns : evidence from Egypt and Tunisia

Abstract

This paper provides evidence on how political shocks and unfavorable security events may affect the performance of the financial markets in Egypt and Tunisia. The objective is to investigate the direct consequences of unfavorable selected key events against a data sample of Egyptian and the Tunisian main market indices. Two different timeframes were assigned to each key event from early 2000 till the end of 2015. Evidence revealed that shocks have had a negative effect on the Egyptian and Tunisian capital market, with a higher magnitude one day after the event. Moreover, the GARCH and the T-GARCH models were applied to model the volatility and the leverage effect of political and security shocks on both indices. Results revealed that volatility was significant in times of shocks at a higher level than in normal times. Threshold-GARCH results indicated that undesirable events have had a greater impact on the fluctuation of the EGX30 returns during the set timeframes than other trading days effect on the returns.