AN IMPACT OF POLITICAL EVENTS ON THE STOC K EXCHANGE OF THAILAND

Weerasak Nimkhunthod9th July 2007

How does politics relate to stock How does politics relate to stock exchange?exchange?

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Starting PointStarting Point

Nordhaus(1975) presented

(PBC)

“Political Business Cycle”

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Starting PointStarting Point

Percent Change in S&P in First and Second Half of Presidential Term

Presidential Election Years

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Starting PointStarting Point

Gartner & Wellershoff (1995, 1999) and Valkanov (2003) supported

= BULL

= BEAR

Comparison of Investor 1 & 2

Election Year

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Starting PointStarting 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 The left wing parties deliver high level of growth and

employment The right wing parties deliver lower inflation rate

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Research Question Research Question & Objectives & Objectives Research Question:

Do Thai political events have any impact on its st ock exchange market ?

Objectives: 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.

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Thai Political HistoryThai Political History

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Democratic transition took place on 24th June 1932

First constitution 10th December 1932 Since then (75 years), there have been

24 prime ministers 23 coup attempts 13 dissolutions 22 elections 3 riots

Thai Politics and the Stock Exchange of Thai Politics and the Stock Exchange of Thailand (SET) Thailand (SET)

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The SET was opened on 1st April 1975, since then (32 years) there have been 13 prime ministers 7 coup attempts

4 succeeded 3 aborted

11 dissolutions 13 elections 2 riots

6th October1976 17th -20th May1992

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Starting PointStarting Point

Literature ReviewLiterature Review Opportunistic Political Business Cycle (OPBC)

was developed by Nordhaus (1975) Incumbents try to manipulate economic policy in

order to increase its probability of re-election

Partisan Political Business Cycle (PPBC) was developed by Hibbs (1977) Economic fluctuations arise as a result of policy

change when different parties alternate in office

For Thailand Apichart Prasert (2002), by using dummy variables,

found the evidence of OPBC but not clear evidence on PPBC

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Theoretical FrameworkTheoretical Framework Uncertain Information Hypothesis (UIH) was

developed by Brown, Harlow and Tinic (1988) 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

Ferguson (2005) presented evidence for the UIH on the S&P500 Index in the post-SPDRs period

Panzalis, Stangeland and Turtle (1999) found a positive AR during the two-week period prior to the election week

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Data SourcesData Sources

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Events DefinitionEvents DefinitionThe event sets are

Dissolution 9 times Election 12 times Coup attempts 7 times

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 MethodologyResearch Methodology Following standard event study technique,

Brown and Warner (1985)

Event Day

Estimation Window

120 days

Post-Event

20 days

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Pre-Event

20 days

Normal Return ModelNormal Return Model Modified market model (Geoffrey (2001))

SETt = β0+β1INDUt-1+β2HSIt+β3NKYt +εt

Constant mean return

SETt = ΣSETi /n where n = 120

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Estimation WindowsEstimation Windows

For both modified market model and constant mean adjusted model 120 days (t = -140, t = -21)

MacKinley (1997) This design provides estimators for

parameters of the normal return model which are not influenced by the return around the event.

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Events WindowsEvents Windows Pre-event window

20 days before the event (t = -21, t = -1)

Event window On the event date (t = 0)

Post-event window 20 days after the event (t = +1, t = +20)

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Dissolution TestingDissolution Testing

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 DissolutionEmpirical Result on Dissolution

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Election Impact Election Impact

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 ElectionEmpirical Result on Election

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Coup Attempt TestingCoup Attempt Testing

H3: Mean returns of the SET portfolio are the same before and after coup attempt. 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 AttemptEmpirical Result on Coup Attempt

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Empirical Result on Aborted CoupEmpirical Result on Aborted Coup

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Empirical Result on Successful CoupEmpirical Result on Successful Coup

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Testing on the Massacre 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 MassacreEmpirical Result on the Massacre

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Riot in May 1992 TestingRiot 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 MayEmpirical Result on the Bloody May

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Pre-Event, Post-Event ResultPre-Event, Post-Event Result

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Pre-Event, Post-Event ResultPre-Event, Post-Event Result

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ConclusionConclusion

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

√

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 & ContributionImplication & Contribution Should investor care about political events?

There is no need to sell if the coup arrives. Political events give speculative opportunity

Buy the end of first trading day after coup Buy 1 week before an election

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An Impact of Political Events on the Stock An Impact of Political Events on the Stock Exchange of ThailandExchange of Thailand

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