Transcript The impact of political events on stock market : Case of

AN IMPACT OF POLITICAL EVENTS ON
THE STOCK EXCHANGE OF THAILAND
Weerasak Nimkhunthod
9th July 2007
How does politics relate to stock exchange?
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Starting Point
Nordhaus(1975)
presented

(PBC)
Do so-so
first period
“Political Business Cycle”
3
Boost up
economy
Get elected
Gain
popularity
Starting Point
Percent Change in S&P in First and Second Half of Presidential Term
Presidential Election Years
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Comparison of Investor 1 & 2
Starting Point
1st & 2nd year
= BEAR
3rd & 4th year
= BULL
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Cumulative Dollar Value
Gartner & Wellershoff (1995,
1999) and Valkanov (2003)
supported
Election Year
Starting Point

Kalecki (1943) reported that the U.S. business cycle
could be altered by the presidency term

Umstead (1977) shown evidence supporting that

Stock market returns are higher in the 3rd and 4th year of
presidency and lower in the 1st and 2nd year
Alesina, Roubini and Cohen (1997) reported ideological
politicians concern on different policies



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The left wing parties deliver high level of growth and
employment
The right wing parties deliver lower inflation rate
Research Question & Objectives
Research Question:
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
Do Thai political events have any impact on its stock
exchange market ?
Objectives:
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Investigate an impact of dissolution, election, coup d'état and
riot on the Stock Exchange of Thailand
If there exists, examine how it influences the SET.
Thai Political History
Democratic transition took place on 24th June 1932
First constitution 10th December 1932
Since then (75 years), there have been
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8
24 prime ministers
23 coup attempts
13 dissolutions
22 elections
3 riots
Thai Politics and the Stock Exchange of
Thailand (SET)

The SET was opened on 1st April 1975, since then (32
years) there have been
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13 prime ministers
7 coup attempts
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11 dissolutions
13 elections
2 riots
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9
4 succeeded
3 aborted
6th October1976
17th -20th May1992
Starting Point
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Literature Review

Opportunistic Political Business Cycle (OPBC) was
developed by Nordhaus (1975)
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Partisan Political Business Cycle (PPBC) was developed by
Hibbs (1977)
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Incumbents try to manipulate economic policy in order to
increase its probability of re-election
Economic fluctuations arise as a result of policy change when
different parties alternate in office
For Thailand

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Apichart Prasert (2002), by using dummy variables, found the
evidence of OPBC but not clear evidence on PPBC
Theoretical Framework
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Uncertain Information Hypothesis (UIH) was developed
by Brown, Harlow and Tinic (1988)
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Price overreacts to bad news and underreacts to goods news
Price response following anticipated negative events will be
positive and those following anticipated positive events
nonnegative
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Ferguson (2005) presented evidence for the UIH on the
S&P500 Index in the post-SPDRs period
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Panzalis, Stangeland and Turtle (1999) found a positive AR
during the two-week period prior to the election week
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Data Sources
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Events Definition
The event sets are
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Dissolution 9 times
Election 12 times
Coup attempts 7 times
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4 succeeded
3 aborted
Massacre on 6th October 1976
Riot during 17th-20th May 1992
 2 dissolutions and 1 election are disregarded because they
are not satisfying the criteria
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Research Methodology

Following standard event study technique, Brown and
Warner (1985)
Estimation Window
120 days
Pre-Event
Post-Event
20 days
20 days
Event Day
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Normal Return Model
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Modified market model (Geoffrey (2001))
SETt = β0+β1INDUt-1+β2HSIt+β3NKYt +εt
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Constant mean return
SETt = ΣSETi /n
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where n = 120
Estimation Windows
For both modified market model and constant mean
adjusted model
 120 days
(t = -140, t = -21)

MacKinley (1997)
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This design provides estimators for parameters of the
normal return model which are not influenced by the
return around the event.
Events Windows
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Pre-event window
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Event window
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20 days before the event (t = -21, t = -1)
On the event date (t = 0)
Post-event window
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20 days after the event (t = +1, t = +20)
Dissolution Testing
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H1: Mean returns of the SET portfolio are the same
before and after dissolution

UIH expects positive abnormal return in the post-event
window
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Empirical Result on Dissolution
4%
CAR for dissolution announcement
Modified Market Model
3%
Constant Mean Return Model
2%
CAR
1%
0%
-1%
-2%
-21
-20
-19
-18
-17
-16
-15
-14
-13
-12
-11
-10
-9
-8
-7
-6
-5
-4
-3
-2
-1
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
-3%
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Election Impact
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H2: Mean returns of the SET portfolio are the same
before and after election.

UIH expects positive abnormal return in long event
window
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Empirical Result on Election
4.5%
4.0%
3.5%
CAR for election announcement
Modified Market Model
Constant Mean Return Model
3.0%
CAR
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
-0.5%
-21
-20
-19
-18
-17
-16
-15
-14
-13
-12
-11
-10
-9
-8
-7
-6
-5
-4
-3
-2
-1
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
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-1.0%
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Coup Attempt Testing
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H3: Mean returns of the SET portfolio are the same
before and after coup attempt.
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
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H31 : Mean returns of the SET portfolio are the same
before and after aborted coup
H32 : Mean returns of the SET portfolio are the same
before and after coup d'état
UIH suggests immediate negative abnormal return and
positive abnormal return in the longer event window
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Empirical Result on Coup Attempt
12%
10%
CAR for coup attempt announcement
Modified Market Model
Constant Mean Return Model
8%
CAR
6%
4%
2%
0%
-21
-20
-19
-18
-17
-16
-15
-14
-13
-12
-11
-10
-9
-8
-7
-6
-5
-4
-3
-2
-1
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
-2%
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Empirical Result on Aborted Coup
3%
2%
CAR for aborted coup announcement
Modified Market Model
Constant Mean Return Model
1%
CAR
0%
-1%
-2%
-3%
-21
-20
-19
-18
-17
-16
-15
-14
-13
-12
-11
-10
-9
-8
-7
-6
-5
-4
-3
-2
-1
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
-4%
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Empirical Result on Successful Coup
20%
CAR for successful coup announcement
Modified Market Model
Constant Mean Return Model
15%
CAR
10%
5%
0%
-21
-20
-19
-18
-17
-16
-15
-14
-13
-12
-11
-10
-9
-8
-7
-6
-5
-4
-3
-2
-1
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
-5%
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Testing on the Massacre

H4 : Mean returns of the SET portfolio are the same
before and after the massacre on 6th October 1976

UIH predicts immediate negative abnormal return and
rebound in the longer event window
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Empirical Result on the Massacre
1.5%
CAR for the massacre on 6th October 1976
1.0%
0.5%
0.0%
CAR
-0.5%
-1.0%
-1.5%
-2.0%
-2.5%
Modified Market Model
Constant Mean Return Model
-21
-20
-19
-18
-17
-16
-15
-14
-13
-12
-11
-10
-9
-8
-7
-6
-5
-4
-3
-2
-1
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
-3.0%
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Riot in May 1992 Testing

H5 : Mean returns of the SET portfolio are the same
before and after the riot during 17th - 20th May 1992

UIH anticipates negative abnormal return in short event
window and rebound in the longer event window
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Empirical Result on the Bloody May
5%
CAR for the riot in May 1992
0%
-5%
CAR
-10%
-15%
-20%
-25%
-30%
Modified Market Model
Constant Mean Return Model
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-20
-19
-18
-17
-16
-15
-14
-13
-12
-11
-10
-9
-8
-7
-6
-5
-4
-3
-2
-1
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
-35%
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Pre-Event, Post-Event Result
CAR for dissolution, election and coup
12%
dissolution
election
10%
coup attempt
8%
coup d'etat
aborted coup
CAR
6%
4%
2%
0%
-2%
-4%
-21
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-19
-17
-15
-13
-11
-9
-7
-5
-3
-1
1
3
5
7
9
11
13
15
17
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Pre-Event, Post-Event Result
CAR for the massacre 1976 and the riot 1992
5%
0%
-5%
CAR
-10%
-15%
-20%
-25%
massacre
-30%
riot
-35%
-21
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-19
-17
-15
-13
-11
-9
-7
-5
-3
-1
1
3
5
7
9
11
13
15
17
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Conclusion
Supporting UIH
Dissolution has no significant impact on SET
Election gives positive influence to SET in long term
SET overreacts to coup attempt
Aborted coup sends positive signal to SET in long term
√
√
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Successful coup gives a bigger shock than an aborted one
There is no significant impact from the massacre on 6th
October 1976 on SET
The riot in May1992 does drop the SET return
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√
Implication & Contribution

Should investor care about political events?
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There is no need to sell if the coup arrives.
Political events give speculative opportunity
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Buy the end of first trading day after coup
Buy 1 week before an election
An Impact of Political Events on the Stock
Exchange of Thailand
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