Impact of political uncertainty on stock market returns: the case of post-revolution Tunisia

Abstract

This study examines whether and how political uncertainty affects the returns of the TUNINDEX index. The impact of the main political events is supported by parametric and non-parametric tests with an event-driven approach as well as regression analysis. These events are then classified into a typology at different levels to later conduct separate analyses on increasingly homogeneous types. To our knowledge, this work constitutes the first work that tries to tackle the impact of political uncertainty on the Tunisian stock market from this perspective. Our empirical results show that the market response varies according to event type. Thus, the popular uprising has a destructive effect on stock market returns. Democratic transition positively affects the market. The announcement of the election results leads, on average, to a positive reaction and stipulates, among other things, that the market prefers secularists rather than Islamists. Partisan conflicts are destructive to stock market returns. Tunisia offers us a real and rare field of experimentation for a battery of major political events, with the persistence of the state and its institutions. The results of our study are of direct interest to financial authorities and decision-makers who wish to assess the role of political uncertainty in triggering or exacerbating stock price movements and contribute to a better understanding of investor behavior.