Literature Review On Non Economic Information
2.0 - Literature review
We know that for a stock market to be efficient, the prices of the stock market should be adjusted and reflected the real price of the stock based on both economic and non-economic information that may be relevant. The non-economic information which I am focusing on is the political events that have believed to have influenced against the financial instruments such as stock market. Therefore, (Mohammad and Sektar, 2002) want to test this hypothesis to some of the emerging markets where the political uncertainties are more common. They have analyzed the effect of the political events by creating dummy variables for the political events that they perceived to be important on the stock indices of some selected emerging stock market indices from four countries which are India, Indonesia, Pakistan and Sri Lanka. Their results show that the financial markets monitor important political events carefully. The stock indices will be reacted properly at appropriate times only to those political events that seem to have some long term effect to their country. (Vadym, 2005) also investigates the relationship between economic and non-economic news (political news) to the behaviour of the Ukrainian stock market. Dummy variable are used for the main political events in their analysis. There are two types of dummy variables that record the political events. The first dummy variable is responsible for the main political events which could have (in his opinion) positive impact on the behaviour of stock return in Ukraine while the other dummy variable is vice versa. In his conclusion, he found out that both economic and non-economic news (political news) do influence the behaviour of Ukrainian stock market returns. Secondly, the stock returns in Ukraine are responding more to non-monetary news while the responses to monetary news are insignificant. Thirdly, his study also showed that only “good” political events have significant impact on behaviour of stock returns. From him, “good” news is define as the investors need to revise their estimates of future returns upward than downward, or that “good” news is more informative than “bad” news. In his point of view, he believe that only positive values of news have significant effects on stock returns and reveals information about the market efficiency.
Some researchers study about the relationship between elections and financial markets. (Christos, 2008) investigates about whether the Athens Stock Exchange (ASE) is influenced by the Greek political elections from the period 1996-2002 by using ordinary least square method. He use one dummy variable to record one month before and after election for his first case and use another dummy variable to record 15 days before and after the election date for second case. His results show that there is a negative effect of the political elections on the course of the ASE and the effect is not statistically significant. (Angela and Wilson, 2008) investigate whether the four general elections in Kenya from 1992 to 2007 will influence the performance of Nairobi Stock Exchange. They found out that the performance of the stock market in Kenya has significantly difference for the year before and after the general elections and they suggest that the stock market reaction is strongly link to the political events.
Some researchers investigate how the individual stock will be affected by political events. (Manning, 1989) investigates the behaviour of the British Telecom (BT) share price over a three-year period to detect whether the political effect existed, whether it was stable over the sample period and whether the effect persisted after the election in 1987. Then he found out that the estimated relationship between the return to BT and the political variables is stable throughout the pre-election period and the political effect is unimportant after the election took place. (Marie, Jean and Naceur, 2006) investigate the short-run impact of the political uncertainty associated with a possible Qucbec separation on the stock returns of Qucbec-based firms resulting from the 1995 Qucbec referendum. Their results indicated that the short-run effect of the referendum results on stock returns is positive and statistically significant for the portfolio that being tested.
Furthermore, in the study by (Nimkhunthod, 2007), he intend to test the uncertain information hypothesis (UIH) for the Thai stock market by investigating the impact of its political activities. UIH is developed by (Brown, Harlow and Tinic, 1988) and it explained the reaction of risk adverse investors to the new unanticipated information that occurred all of a sudden. Therefore, the common perception of stock market reaction regarding political events and its return is seems to be positive after favourable events if unfavourable events occur. He found out that the election gives positive impact to the market in the long term. Moreover, the accessibility to news has improved from the old days and the market participants are getting more and more sophisticated. His results are consistent with the UIH, postulating the possibility of an overreaction on bad news and under reaction on good news.
When I am studying the effect of how the political events is going to affect the financial markets, there are some studies combined political issues and other non-economic events such as crime, corruption and terrorism. (Juan, Maria and Arlene, 2009) make a study in whether the Colombia stock markets are influenced by the performance of global stocks, political uncertainty, crimes and day-of-the-week effects. Dummy variables are used to record the political uncertainties in the country during election period. The dummy variable which is Poluner takes the value of one, eight working days prior to the presidential election and eight working days after the election. Later the results indicate that the political uncertainties and crime rates are important determinants of stock market returns in Colombia. Moreover, political uncertainty eliminates the market activity, indicating that the uncertainty associated with presidential elections will make a decline in trading volume.
Some studies have been investigated that different aspects regarding the relationship between the political news and the behaviour of financial markets. (Merwe and Smit, 1997) investigate the relationship between domestic political news events and share market activity on the Johannesberg Stock Exchange (JSE) as measured by volume traded and of share indices in South Africa. Many people believe that political events have an influence on financial markets especially in South Africa because this country has gone through a period of transition. Furthermore, the transition period was characterised by political uncertainties and violence. The influences of these political events on the Johannesberg Stock Exchange were highlighted in articles as follow, “Domestic politics and international economics have conspired to produce a remarkable convergence of forces driving the Johannesberg Stock Exchange to dizzy heights” (Van Staden and Steward, 1994). (Merwe andSmit, 1997) then found out the four indicators of market activity they investigated, the volume traded on the JSE shows the strongest relationship with the number of domestic political news events.
Some researchers have used new approach to investigate the relationships between political connection and corporate firms. In the study of (Mara and David, 2005), they provided a direct evidence on the value of corporate political connections by looking at stock price reactions of 7080 companies around the 123 sudden death of a politician around the world. They show that political ties which can be identified from the location of a company’s headquarters and the city of the politician that are death are particularly valuable for shareholders of their companies. Their overall event study results show an average price decline of -1.93% around the death of the politician from around the world.
Political uncertainties exert more influence on emerging countries but we want to know how about the developed countries will be influenced by political uncertainties or not. (Wang, Lee and Lin, 2008) used the event study and panel data to examine the effects of general election and political change in developed stock market such as United States, Japan, United Kingdom and France from 1979 to 2001. Their results show that there is inverse information during the political change. Stock returns were captured according to the Hausman test by the fixed-effect model to fit the stock market. They found out that political changes are negatively related to the developed countries of British, French, American, and Japanese stock return. Furthermore, the political change also will have effect on stock returns after the 1987 crash significantly exceed those prior to the 1987 crash. They further pointed out that political change was originally intended as an incumbent party impetus to create opportunities for progress but however, this has caused great political party distress and creating political change with an inverse stock return relationship in developed countries.
In (Maxim, Marcus, 2005) studies, they want to test the hypothesis that the involvement of politicians in economic life as measured by the “political risk” category is associated with worse economic performance. Then they found out that when they relate the stock market based measures to economic development of emerging market countries, the political influence in economic life is the most important explanatory variable.
(Chen, Bin and Chen, 2005) examine the impact of political events on the stock performance for Taiwanese firms with high and low Qualified Foreign Institution Investor (QFII) ownerships. The political risk is refers to the uncertainty that arise from incidents that have strong political implication, and such events include elections, government policy changes, catastrophes, and domestic conflicts which can materially affect security prices. Their OLS results suggests that between high and low QFII firm, their abnormal return behaviours should be significantly different from each other, with the more low QFII firm on average experiencing a more observable price reaction to Taiwan’s political turmoil. While in Malaysia, (Norli, Annuar, Taufiq and Sazali, 2010) have studied the evidence of short run stock overreaction with respect to the arrival of dramatic events in the Malaysian stock market. They found out that the Malaysian stock market overreacts to economic crisis and extraordinary political events from 1987 to 2006.
On the hypothesis of “There is impact of political events on stock volume and trading volume. (Sidra, Shahid and Shakil, 2009) examine the relationship between aggregate stock market trading volume and daily stock return on KSC 100 index in Pakistan. They used the Philips Perron unit root test to investigate the relationship between trading volume and stock returns. Their results showed that political events affect the stock price due to which the trading volume and stock return fluctuate positively or negatively as per intensity of the event.
(Jedrzeg, Katrin and Tomasz, 2007) investigate whether the stock returns in different countries depends on the political orientation of the incumbents at 24 different stock markets and 173 different governments. Their results show that there are no statistically significant differences in returns between left-wing and right-wing governments in the election period and throughout the tenure.
(Wang and Lin, 2008) investigate the reaction of TAIEX stock market behaviour to the political activities by using univariate asymmetric GARCH model. They use stock return volatility as a measure of the impact of political uncertainty during the congressional period to examine to relationship of the stock market reaction and political behaviour in Legislative Yuan. Their results show that there are no congressional effect exists for TAIEX volatility. Moreover, they also found that the investors always adjust their allocation in their portfolio accordingly to measure the stock market efficiently reflect congressional.
(Andrea, 2006) studies about the political uncertainty can be hedged by the shares traded on U.S stock market. He makes two portfolios which each composed of different stocks under the alternative candidates for the 2000 U.S presidential election and investigate what is the extent of the price movements of the two portfolios are correlated with electoral polls in the period prior to the election. Their results show that normal people can identify which stock is significant which correlated with most probability for the candidate’s victory in the general election. It suggests that this is a simple and intuition method for normal people to choose stock without referring to those complicated financial instruments.
(Cheah and Lee) investigate about the presence of long memory, or fractional dynamics, in the return series for the London Stock Exchange (LSE) in the face of post general election results. They use spectral regression method and they suggest that none of the elections have long memory and implied that the stock market is efficient in the weak-form with respect to prices being independently distributed.
As we can see that there are many studies in the finance literature have confirmed that stock price can be influenced by a variety of macroeconomic variables. Not many studies have considered the influence of only political events on the behaviour of stock market prices. For my research I am going to investigate the relationship between the Malaysian stock market and the domestic political events. In Malaysia, the political involvement is quite strong suggesting that the business and politics are interrelated. In the study of (Chen, 2005), he found out that in Malaysia market capitalization, 20% of it is comprised of politically linked firms.
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