Does Political Stability affect the Stock Market Performance?: A Worldwide Outlook

Abstract

This paper examines the impact of political stability on market price performance across countries from four continents: Europe, the Americas, Asia, and Africa. The sample includes ten countries from each continent, selected based on World Bank classifications, for the period 2008-2022. Testing hypotheses has been conducted using GMM technique, where Z-moments are projected into the column space of instrumental variables. This technique minimizes variance and enhances parameter estimate precision by focusing on Z-moments and applying GLS techniques. The analysis involves independent variables such as political stability, GDP per capita, foreign direct investment (FDI), and inflation rate, measured according to World Bank standards. When controlling for macroeconomic indicators, the results indicate that political stability alone has a minimal impact on market prices in Europe and Africa, but its significance increases when combined with GDP per capita and FDI. In the Americas and Asia, political stability shows a more obvious impact, especially when combined with other economic factors. Overall, the findings have highlighted that while political stability is important, economic indicators like GDP per capita and FDI play a crucial role in influencing market prices across all regions. In addition, results may shed lights for policymakers and regulators to assess the responses of country and industry effects to political instability.