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					AN IMPACT OF POLITICAL EVENTS ON
THE STOCK EXCHANGE OF THAILAND




                   Weerasak Nimkhunthod
                             9th July 2007
How does politics relate to stock exchange?




2
Starting Point

       Nordhaus(1975)                   Do so-so
                                       first period
        presented



        (PBC)            Get elected
                                                      Boost up
                                                      economy




“Political Business Cycle”               Gain
                                       popularity

    3
Starting Point
      Percent Change in S&P in First and Second Half of Presidential Term




         Presidential Election Years


4
                                                         Comparison of Investor 1 & 2

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




                               Cumulative Dollar Value
  1st & 2nd year   = BEAR


  3rd & 4th year   = BULL



 5                                                                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
           The left wing parties deliver high level of growth and
            employment
           The right wing parties deliver lower inflation rate

    6
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.




    7
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




    8
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



    9
Starting Point




10
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

    11
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
     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

    12
Data Sources




13
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

 14
Research Methodology
    Following standard event study technique, Brown and
     Warner (1985)

          Estimation Window   Pre-Event          Post-Event



              120 days         20 days               20 days



                                         Event Day




    15
Normal Return Model
    Modified market model (Geoffrey (2001))

         SETt = β0+β1INDUt-1+β2HSIt+β3NKYt +εt

    Constant mean return

         SETt = ΣSETi /n    where n = 120




    16
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.




17
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)




    18
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




    19
 Empirical Result on Dissolution
                          CAR for dissolution announcement
      4%
           Modified Market Model

      3%
           Constant Mean Return Model

      2%


      1%
CAR




      0%


  -1%


  -2%


  -3%
             3
             0
             1
             2

             4
             5
             6
             7
             8
             9
            10
            11
            12
            13
            14
            15
            16
            17
            18
            19
            20
           -21
           -20
           -19
           -18
           -17
           -16
           -15
           -14
           -13
           -12
           -11
           -10
            -9
            -8
            -7
            -6
            -5
            -4
            -3
            -2
            -1




      20
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




    21
  Empirical Result on Election
                              CAR for election announcement
      4.5%

      4.0%
             Modified Market Model

      3.5%   Constant Mean Return Model

      3.0%

      2.5%

      2.0%
CAR




      1.5%

      1.0%

      0.5%

      0.0%

  -0.5%

  -1.0%
             -18




             -11




              -4




               3
             -21
             -20
             -19

             -17
             -16
             -15
             -14
             -13
             -12

             -10
              -9
              -8
              -7
              -6
              -5

              -3
              -2
              -1
               0
               1
               2

               4
               5
               6
               7
               8
               9
              10
              11
              12
              13
              14
              15
              16
              17
              18
              19
              20
       22
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


    23
 Empirical Result on Coup Attempt
                         CAR for coup attempt announcement
  12%
           Modified Market Model
           Constant Mean Return Model
  10%


      8%


      6%
CAR




      4%


      2%


      0%


  -2%




            16
             0
             1
             2
             3
             4
             5
             6
             7
             8
             9
            10
            11
            12
            13
            14
            15

            17
            18
            19
            20
           -16




            -1
           -21
           -20
           -19
           -18
           -17

           -15
           -14
           -13
           -12
           -11
           -10
            -9
            -8
            -7
            -6
            -5
            -4
            -3
            -2




      24
 Empirical Result on Aborted Coup
      3%
                         CAR for aborted coup announcement
            Modified Market Model
            Constant Mean Return Model
      2%



      1%



      0%
CAR




      -1%



      -2%



      -3%



      -4%
             -7




             14
            -21
            -20
            -19
            -18
            -17
            -16
            -15
            -14
            -13
            -12
            -11
            -10
             -9
             -8

             -6
             -5
             -4
             -3
             -2
             -1
              0
              1
              2
              3
              4
              5
              6
              7
              8
              9
             10
             11
             12
             13

             15
             16
             17
             18
             19
             20
      25
      Empirical Result on Successful Coup
                           CAR for successful coup announcement
      20%
             Modified Market Model
             Constant Mean Return Model
      15%




      10%
CAR




      5%




      0%




      -5%




              12
               0
               1
               2
               3
               4
               5
               6
               7
               8
               9
              10
              11

              13
              14
              15
              16
              17
              18
              19
              20
             -11
             -21
             -20
             -19
             -18
             -17
             -16
             -15
             -14
             -13
             -12

             -10
              -9
              -8
              -7
              -6
              -5
              -4
              -3
              -2
              -1




        26
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




    27
 Empirical Result on the Massacre
           CAR for the massacre on 6th October 1976
  1.5%

  1.0%

  0.5%

  0.0%

 -0.5%
CAR




 -1.0%

 -1.5%

 -2.0%

 -2.5%                                       Modified Market Model
                                             Constant Mean Return Model
 -3.0%




            14
             0
             1
             2
             3
             4
             5
             6
             7
             8
             9
            10
            11
            12
            13

            15
            16
            17
            18
            19
            20
           -21




            -9
           -20
           -19
           -18
           -17
           -16
           -15
           -14
           -13
           -12
           -11
           -10

            -8
            -7
            -6
            -5
            -4
            -3
            -2
            -1




      28
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




    29
 Empirical Result on the Bloody May
                               CAR for the riot in May 1992
      5%


      0%


      -5%


  -10%
CAR




  -15%


  -20%


  -25%


  -30%      Modified Market Model
            Constant Mean Return Model
  -35%
            -19




             -8
            -21
            -20

            -18
            -17
            -16
            -15
            -14
            -13
            -12
            -11
            -10
             -9

             -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
      30
 Pre-Event, Post-Event Result
                                     CAR for dissolution, election and coup
      12%
                   dissolution
      10%          election
                   coup attempt
      8%           coup d'etat
                   aborted coup
      6%
CAR




      4%


      2%


      0%


      -2%


      -4%
            -21   -19   -17   -15   -13   -11   -9   -7   -5   -3   -1   1   3   5   7   9   11   13   15   17   19



      31
 Pre-Event, Post-Event Result
                                CAR for the massacre 1976 and the riot 1992
       5%


       0%


       -5%


      -10%
CAR




      -15%


      -20%


      -25%

                         massacre
      -30%
                         riot
      -35%
             -21   -19    -17   -15   -13   -11   -9   -7   -5   -3   -1   1   3   5   7   9   11   13   15   17   19


      32
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           √
 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                     √



33
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




    34
An Impact of Political Events on the Stock
Exchange of Thailand




35

				
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