Unanticipated Political Events and Stock Returns: An Event Study

Abstract

The study focuses on market reaction to announcements of new unanticipated political events using the event analysis methodology. The findings of the study provide a consistent conclusion regarding the existence of information content hypothesis in the Nepalese stock market. The study reveals that good-news (badnews) political announcements generate positive (negative) abnormal returns in the post-event period. The data present important evidence on the speed of adjustment of stock prices to new political information, i.e., in as many as 2 to 3 days from the announcement date. Thus, this paper finds that the Nepalese stock market is inefficient at a semi-strong level, but there is a strong linkage between political uncertainty and common stock returns.

Determinants of Stock Market Performance in Nepal

“…It shows that people have been gradually taking stock market as a hedge against inflation and invest in this market when there is ample liquidity available at a low interest rate. More importantly, the stock market performance has been found to be influenced by political changes similar to finding of Dangol (2008) and the NRB's policy. The positive outlook for political stability has positive impact on stock market index.…”

“…For example, Joshi (2012) examined the impact of dividends on stock price in the context of Nepal and found the impact of dividends is more pronounced than that of retained earnings on stock prices in Nepal. Dangol (2008) studied the reaction of Nepalese stock market to announcements of unanticipated political events using the event analysis methodology. His analysis covered the period from 2001 to 2006.…”

“…There are a lot of research studies on the determinants of stock market in other countries such as Asprem (1989), Yosuf and Majid (2007), Rahman et al (2009), Singh (2010), Hsing (2011Hsing ( , 2014, Eita (2012), Quadir (2012), Naik and Padhi (2012), Jauhari andYadav (2014), andKhan (2014). A very few studies have been done on the Nepalese stock market such as Dangol (2008Dangol ( , 2010, Pradhan and KC (2010), Bhatta (2010) andRegmi (2012). These studies mainly focused on micro perspective rather than macro and policy perspectives.…”

Unanticipated Political Events and Their Effect on the Nepalese Insurance Sector and Stock Market

“…This study explores the multifaceted dimension of unanticipated political events and their impact on the stock market, with a specific focus on the insurance industry within the Nepal Stock Exchange (NEPSE). Political events, characterized by changes in leadership, policy alterations, and geopolitical movements, play a crucial role in shaping global economic environments (Dangol, 2008). In the context of Nepal, the Nepal Stock Exchange (NEPSE) emerges as a focal point for economic activities.…”

“…However, anomalies persist, questioning the comprehensiveness of publicly available information. Dangol (2008) challenges the efficiency of the Nepalese stock market, asserting no substantial connection between political uncertainty and stock returns. Kumar (2013) contributes, emphasizing the impact of industrial performance and an optimistic macroeconomic environment on the stock market.…”