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?
Economy
Political Event
Government Policy
Stock Exchange

3. Starting Point Nordhaus(1975) presented (PBC)
Do so-so first period
Boost up economy
popularity
Gain
Get elected
Nordhaus(1975)
presented
(PBC)
“Political Business Cycle”

4. Starting Point
Percent Change in S&P in First and Second Half of Presidential Term
Presidential Election Years

5. Starting Point = BULL = BEAR
Comparison of Investor 1 & 2
Gartner & Wellershoff (1995, 1999) and Valkanov (2003) supported
Cumulative Dollar Value
1st & 2nd year
= BULL
3rd & 4th year
= BEAR
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
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 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

13. Data Sources
Indices Daily Closing Prices
Bloomberg
Tested Political Events
ประวัติศาสตร์การเมืองไทย; ปฏิรูป ปฏิวัติ รัฐประหาร ของผู้นำการเมือง พลเรือน ตำรวจ ทหาร (พ.ศ.2550)

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
Pre-Event
Post-Event
120 days
20 days
20 days
Event Day

16. Normal Return Model Modified market model (Geoffrey (2001))
SETt = β0+β1INDUt-1+β2HSIt+β3NKYt +εt
Constant mean return
SETt = ΣSETi /n where n = 120

17. Estimation Windows MacKinley (1997)
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.

18. Events Windows Pre-event window Event window Post-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)

19. 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

26. 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

32. Pre-Event, Post-Event Result

33. 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

34. Implication & Contribution
Should investor care about political events?
There is no need to sell if the coup arrives,
Coup gives speculative opportunity
Further research could investigate on
Other political movement such as a change of minister or policy
Deep down to market segment to see how each segment reacts to political events

35. An Impact of Political Events on the Stock Exchange of Thailand
Q&A