Geopolitical Shocks and Short-Term Mean Reversion in Indian Equity Markets: Evidence from Four Event Studies

Abstract

This study examines how geopolitical and systemic shocks affect short-term abnormal returns in Indian equity markets and investigates the role of foreign portfolio flows in these market reactions. Using event study methodology, the study analyses four episodes covering distinct shock types: the Russia-Ukraine war (February 2022), the COVID-19 pandemic declaration (March 2020), the Pulwama attack (February 2019), and the Galwan Valley clash (June 2020). Abnormal returns are calculated on the Nifty 50 and six sectoral indices using a 120-day pre-event estimation window. Daily net FII equity investment data, sourced from NSDL's FPI archive, is used to test the capital-flow hypothesis directly, alongside MCX gold prices and India VIX as supporting indicators of flight-to-safety behaviour. The paper tests four hypotheses: that shocks produce statistically significant abnormal returns; that the magnitude of abnormal returns is associated with FII outflow intensity; that abnormal returns exhibit mean reversion within 15 to 30 trading days; and that globally integrated sectors experience stronger market reactions than relatively defensive sectors. Existing work has generally studied price reactions and capital flow dynamics separately, with much of the empirical base focused on Western or globally diversified markets (Berkman, Jacobsen, & Lee, 2011; Fratzscher, 2012). This analysis combines both in a single India-specific framework across multiple shock types. Results show that FII outflows closely track the initial shock phase of each event but do not fully explain the subsequent price recovery, and that cumulative abnormal returns consistently begin reverting before the underlying geopolitical situation resolves, pointing toward short-term behavioural overreaction rather than immediate efficient repricing.