Extensive work has been done on response of stock markets to a variety of events, such as announcement of a firm’s financial results, changes in a firm’s variables. However, little work has been done on response of stock markets to political events. These events, characterized by their suddenness, are often too short lived to leave an impression on the real economy. Yet, their occurrence results in significant fluctuations in prices of securities. One such event which shook the world was the abortive coup in the Soviet Union in August 1991. In this paper we have analyzed the responses of stock markets in 24 countries to the coup, and found differences in the adjustments processes. We also analyzed the impact of fluctuations in exchange rates, and inferred that changes in exchange rates, generally ignored by studies on market efficiency, could be an important factor in explaining the price movements. The large fluctuations in prices due to political events could partially explain the excessive volatility, not justified by economic reasoning, typically observed in stock markets.
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Paper provided by Indian Institute of Management Ahmedabad, Research and Publication Department in its series IIMA Working Papers with number
1054.