Do you know what happens to the stock market when social unrest occurs like riots and mass protests? Should investors be scared off by the disorder or they should have the perspective of positive and popular change in response to unrest? If you are also wondering about these questions then you are at the right spot. In this blog, you will come across information regarding the way stock markets respond to social unrest.
The charts are drawn from the recent IMF staff working paper use the dataset of around 156 social unrest events between the periods of 2011-20 to put some spotlight on the mentioned questions. It discloses that in the countries with more democratic and open institutions, there is a negligible impact of the social unrest events on the stock market returns. When it comes to the countries with over authoritarian regimes, the effect is greater and negative as it has been observed that the stock market returns decrease by 2 percent in 3 days and around 4 percent in the following month.
These observations are the continuous example with the real-world example. For instance, France’s stock market that is considered an open and strong institution was largely unmoved in the time after the yellow vest protest started in late 2018. There can be different reasons for differencing in different countries other than the political institution. Therefore, the relationship has been also checked that comes after accounting for different factors that can be correlated with the degree of institutional authoritarianism such as the income level of the country of the severity of unrest.
To have a deeper discussion regarding the sort of institution that can be significant, the paper runs more experiments using the six measures of a political and social institution that create the world bank governance indicator. Out of theme, two main factors play a noticeable role in mitigating the reactions of the stock market to social unrest events that include the ability of the government and popular participation in government to regulate markets in different ways to enhance the private sector development.
What Kind Of Investor Actions Might Clarify These Models?
One sign appears from the trade of shares in huge volume that enhances sharply following the severe unrest event. The more trades happen when investors disagree not eh value of an asset; the higher trading volume is the reflection of more uncertainty over the outlook. This observation recommends that social unrest impacts stock market returns via an indirect information channel instead of through direct disruption to the economic activity.
The result implies to those countries with high standards of governance, social unrest does not bring more uncertainty and disagreements regarding future economic performance. This probably shows the ability of the more open institutions to find compromises and reconcile divergent opinions.
With the contrast of the above discussion, you may find flexibility missing in a more authoritarian system. Institutions are less likely to adapt to social problems as social unrest can leads to deter investors, ascertaining and rising different fears.
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