AN IMPACT OF POLITICAL EVENTS ON THE STOC K 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 S&P 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 • ApichartPrasert (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

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 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 • 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

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 Q&A