Macroeconomic NEWS and Capital Market Reaction: A Case of a Developing Country

Abstract

This study investigates the impact of IMF, State Bank, and FATF-related announcements on the performance of PSX in Pakistan, as investors are sensitive to economic uncertainty and economic news. The barometers for stock market performance are KSE-100, KSE-30, and KMI-30 index returns for the period of approximately two business cycles ranging from 2013 to 2021. The analysis clearly shows that IMF announcements have an impact on the movement of KSE stocks because Pakistan is a highly leveraged country where the debt-to-GDP ratio is more than 80%, and above all, IMF is the main lender of our country. Moreover, there is a significant and negative impact of the State Bank announcement on all proxies’ stock returns, which implies that stock returns decrease after the State Bank’s announcements related to inflation, unannounced changes in monetary policy, and discount rate. It is probed that the FATF announcements have significant and negative effects on all proxies’ stock returns because Pakistan is a member of APG and is heavily alleged by opponents for terror financing and money laundering charges. Henceforth, the white list status of Pakistan is vital to survive in the international community.