Post War Volatility in KSE100 Constituents

Preceding the US-Iran war the equity market in Pakistan started declining, partly in expectation that the war between the two countries was going to breakout. Following the initiation of the war Pakistan has been exposed to supply chain and energy risk considering our economy is heavily dependent on imported energy and remittances that come from the GCC region. A lot of our industries rely heavily on partially manufactured exports from the gulf Aswell. Barring these difficulties the market has been displaying high levels of volatility that are affected by Crude prices and lately the market is increasingly affected by the political uncertainty that has been injected into the national economy related to smaller administrative units and protests against government levies and government behavior in general.

We can see quite clearly that the AllShr and KSE100 index are inversely related to oil prices. Mapping the daily returns against the return from the start of the period to the end gives us this distribution with a few outliers. Investors hate uncertainty, it gives investors the jitters, which is expected, but since the Oil Prices have been uncertain, and this quite volatile in the past few months, so has the Pakistan equities market.

The KSE100 index is supposed to broadly mimic the broad market, but it cannot escape the systemic volatility that is present in the system but do certain equities in the KSE100 exhibit less volatility, and perhaps a better value for your investment. The four metrics that we will compare are Close-to-Close volatility, for simple and log returns, Parkinson Volatility, and Garman-Klass volatility.

From the graphs we can see that the normal volatility are significantly higher than the metrics that were taking OHLC (Open, High, Low, and Close).

Regardless of the variation between the two metrics, some of which is going to be down due to calculation the daily volatility average is quite high, which discourages a lot of short-term traders because they are unable to accurately mark their entries or exits from the market. Mapping the return and volatility depicts the problem that currently exists for investors - 48 of the KSE100 constituents have a negative daily average of returns, with 52 being positive, but the positive sample actually exhibit higher volatility, a nightmare for investors and them being able to hedge any position.

From an investment perspective we can, in absolute terms, see that the section of the market, the KSE100 is not particularly hedged or risk averse to the larger macro movements and trends of the broader equity market, therefore an investment in the index or constituents of the index is not going to present a hedge against oil movement shocks.

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All information disseminated on this site is sourced from public records and sources which MesoQuill believes to be reliable and accurate, however the firm makes no guarantees related to the information and data's reliability and accuracy. The content on the website is meant for education, illustrative, and knowledge purposes and should not be taken directly as investment advice.