AN IMPACT OF POLITICAL EVENTS ON THE STOCK EXCHANGE OF THAILAND

1
AN IMPACT OF POLITICAL EVENTS ON THE STOCK
EXCHANGE OF THAILAND

• Weerasak Nimkhunthod
• 9th July 2007

2
How does politics relate to stock exchange?
3
Starting Point

• Nordhaus(1975)
• presented
• (PBC)
• Political Business Cycle

4
Starting Point
Percent Change in SP in First and Second Half of
Presidential Term
Presidential Election Years
5
Starting Point
Comparison of Investor 1 2
Gartner Wellershoff (1995, 1999) and Valkanov
(2003) supported
Cumulative Dollar Value
1st 2nd year
BEAR
3rd 4th year
BULL
Election Year
6
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
• The left wing parties deliver high level of
  growth and employment
• The right wing parties deliver lower inflation
  rate

7
Research Question Objectives

• Research Question
• Do Thai political events have any impact on its
  stock 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.

8
Thai Political History

• 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

9
Thai Politics and the Stock Exchange of Thailand
(SET)

• 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

10
Starting Point
11
Literature 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

12
Theoretical 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 SP500 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

13
Data Sources
14
Events Definition

• The 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

15
Research Methodology

• Following standard event study technique, Brown
  and Warner (1985)

• Estimation Window

• Post-Event

• Pre-Event

120 days
20 days
20 days
Event Day
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Normal Return Model

• Modified market model (Geoffrey (2001))
• SETt ß0ß1INDUt-1ß2HSItß3NKYt et
• Constant mean return
• SETt SSETi /n where n 120

17
Estimation 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 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 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

20
Empirical Result on Dissolution
21
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

22
Empirical Result on Election
23
Coup 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

24
Empirical Result on Coup Attempt
25
Empirical Result on Aborted Coup
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Empirical Result on Successful Coup
27
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

28
Empirical Result on the Massacre
29
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

30
Empirical Result on the Bloody May
31
Pre-Event, Post-Event Result
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Pre-Event, Post-Event Result
33
Conclusion
34
Implication 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

35
An Impact of Political Events on the Stock
Exchange of Thailand

• QA