Opinion Polls And The Stock Market: Evidence From The 2013 Zimbabwe Presidential Elections
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Researchjournali’s Journal of Finance
Vol. 2 | No. 4 April | 2014 ISSN 2348-0963
1
Opinion Polls And
The Stock Market:
Evidence From The
2013 Zimbabwe Dennis Murekachiro
Department of Banking and Finance, Bindura
University of Science Education, Bindura,
Presidential Elections Zimbabwe
www.researchjournali.comResearchjournali’s Journal of Finance
Vol. 2 | No. 4 April | 2014 ISSN 2348-0963
2
Abstract
The paper‟s aim was to examine the immediate effect of Presidential elections on the Zimbabwe stock
exchange [ZSE]. Using daily data from the general index on the ZSE, the study sought to examine the impact
of Presidential elections on the stock market in the pre-election and post –election periods.
Research Design: An event study was conducted for this paper focusing on two key parameters; namely
stock return variability and volumes. Daily closing prices on the ZSE general index are used for this analysis
for the period of 120 days preceding and 30 days after the 31st July 2013 elections.
Findings: There is strong evidence of abnormal returns prior to and after the event. However, as we
approached the event date, low volume margins were traded and cumulative abnormal returns were very low.
For periods prior to the event date, cumulative returns were minimal due to uncertainty of Presidential results
whereas the post event period was represented with high cumulative abnormal returns.
Research Limitations/Implications: The results of this research are very important not only to academics,
industry experts, and investors but also to policy makers as they provide a close by view of the stock market
participant‟s response to expected changes in policy making as a result of presidential elections.
Originality/Value: This study is the first of its kind in the Zimbabwean context and research findings provide
practical strategies for financial analysts to use during their buy/sell or hold decisions.
Keywords: Stock Market, Stock Return Variability, Volumes, Presidential Elections
1. Introduction
In the history of the Zimbabwe Stock Exchange [ZSE], after the dollarization of the economy in April 2009,
the stock market was filled with great election anxiety during the period to the 31 July 2013elections as well
as after that. Expectations about election results and potential changes in government policy are not always
clear cut. An increasing likelihood of a candidate‟s victory and expected changes in policy should therefore be
reflected in stock prices prior to the election (Oehler 2013). Following a five year period of a Government of
National Unity (GNU) between ZANU PF, MDC T and MDC M, the 31st July 2013 Presidential elections
were to elect a new government. A great wave of uncertainty in the stock market was extensive. It is the aim
of this paper to examine the effect of this Presidential election on the stock market, particularly focusing on
stock return volatility and trading volume changes. Daily stock price data on ZSE 120 days before and 30
days after the election was used in this study. Furthermore, the paper also examined the relationship between
politics and finance as reflected in the stock prices prior to the elections and after. The paper is organised as
follows; in section 2, related literature review is expound on. The sequel section 3 explains on the history of
the Zimbabwe Stock Exchange whereas Section 4 presents the event study methodology used in the analysis
and findings. Section 5 discusses the findings and concludes the paper.
www.researchjournali.comResearchjournali’s Journal of Finance
Vol. 2 | No. 4 April | 2014 ISSN 2348-0963
3
2. Literature Review
Political events are a major influence on financial markets. Markets tend to respond to new information
regarding political decisions that may impact on a nation‟s fiscal and monetary policy. Therefore, it is
possible to expect to find some relationship between the stock market and Presidential elections as in the
United States (Demisseur Diro Ejara et al 2012).
Empirical literature on the link between stock market performance and political election dates back to
Niederhofer et al (1970) who studied market behaviour around elections. As such, political events are closely
followed by investors who revise their expectations based on the outcomes of these events (Pantzalis et al,
1999). Bialkowski et al (2009) found a strong relationship between political elections and stock movements
across the globe. As we move towards Presidential Election Day, we would expect the market to be more
nervous and perhaps downward-bound, with limited transactions owing to uncertainty about the results. The
electoral uncertainty increases, in the pre-election period due to investor‟s anticipation of policy changes. A
notable behaviour of stock markets is that share price volatility increases as a result of uncertainty about
election results and their impact thereof. (Jones, 2008) is of the view that an increase in stock volatility of the
futures markets in tight elections is a result of uncertainty about election results and their implications.
Expectations about election results and the potential changes in government policy are not always clear cut.
An increasing likelihood of a candidate‟s victory and expected changes in policy should be reflected in stock
prices prior to the election (Oehler, 2013). A wave of high political uncertainty that in turn affects firm and
stock market performance is imminent.
Such periods of high uncertainty are reduced when voting results are announced. Such uncertainty is further
reduced at least a day after the election day and even more after the inauguration, when the incoming
president discloses more detail about the political road map for the presidential term(Oehler, 2013). In the
Zimbabwean context, such uncertainty was still rampant even after the results and ministerial cabinet were
announced. Most investors were taking in a “wait and see” approach to investing as they were waiting to see
how the first one hundred days in Office of the President were likely to have an impact on the economy and as
well as the stock market.
Pastor and Veronesi (2012) postulate that stock price volatilities depend among other factors on the firm‟s
exposure to government policy. The most affected sectors of the economy and stock market would be shown
in the results section of this paper. In a sample including 27 OECD countries, Bialkowski et al (2008) found
out a significant increase in stock market volatility during the week around the Election Day. Their argument
is based on the notion that increased volatility during this period reflects the investors‟ uncertainty about the
www.researchjournali.comResearchjournali’s Journal of Finance
Vol. 2 | No. 4 April | 2014 ISSN 2348-0963
4
election result, which in turn supports the view that investors would still be surprised about the actual election
outcome.
In addition, through an event study analysis of Quebec referendum of 30 October 1995, it revealed that
political activities have significant impact on stock market performance (Beaulieu et al 2006). The study used
Garch model to measure stock price volatility and found out that the effect of the referendum results on these
stock returns is positive and statistically significant. A number of similar studies have also been conducted
throughout the world examining the relationship between political events and stock market performance. Li
and Born (2006) suggest a link between common stock returns and political outcomes. They made an attempt
to analyse the relationship between presidential elections uncertainty and common stock returns in the United
States, showing the stock returns on the pre and post election. They reported that the mean daily common
stock return rises roughly three month period before a US Presidential Election when the outcome of the
election is uncertain.
Jensen and Schmith (2005) find significant presidential candidate impacts on the stock market returns and
volatility in the Brazilian election of 2002. In another study by Nippani and Medlin 2002, they found out that
elections are widely watched events by stock markets and that election results impact the performance of the
market. Another related recent study that examined the impact of political elections on stock market indices is
by Pantzalis, Stangeland and Turtle (2000). They analysed the behaviour of stock market indices across 33
countries around political election dates for a sample period of 1974- 1995. They present evidence indicating
that elections do impact stock markets across their sample countries. Chan and Wei (1996) show that political
news had a significant impact on the Hang Seng index but no significant impact on the China related Red
Chip stock index. Relating stock market performance to conservative party polling in the United Kingdom,
Ioannidis and Thompson (1986) found contrary results that point out a positive but statistically insignificant
relationship between stock market returns and conservative party leads in political polling. Allivine and
O‟Neil (1980) presented strong evidence in support of the relation between stock market returns and the
Presidential election cycle.
In a different paper, in investigating the behaviour of British Telecom (BT) shares over a three year period
examining the effect of political uncertainty on the stock market, Manning (1989) tests if this political effect
actually existed and whether it was stable and persisted after the election of 11 June 1987. The results show
that the price of BT shares respond strongly to the opinion polls. In addition, a close relationship between
polls and the FTSE -100 index (for the 1987 and 1992 elections respectively) was found out by Gemill (1992)
and Gwilym and Buckle (1994).
www.researchjournali.comResearchjournali’s Journal of Finance
Vol. 2 | No. 4 April | 2014 ISSN 2348-0963
5
Examining the effect of election polls on the Toronto Stock Exchange during the campaign period of the 1988
Canadian election, Brander (1991) examines the “poll influence” hypothesis (i.e. the whether the election
polls influence the stock market). His research findings support the “poll influence” hypothesis and therefore,
polls have a statistically and economically effect on stock prices. Pantzalis et al (2000) use election dates to
test how stock markets perform before and after electoral for a number of countries. He finds out that stock
markets are responsive to political information. In an attempt to address the question whether the 2000
presidential election cause an increase in volatility of the US stock market, Leblang (2000) tests the
relationship between politics and financial markets. Using Garch models, Leblang (2000) tests the mixture of
distribution hypothesis and finds that stock markets are less volatile.
Following the election result, the ZSE main industrial index reacted to the news plunging 11%, marking it as
the biggest fall since the adoption of multi currencies in January 2009 (Newsday, August 16 2013). Many
studies on the link between economic performance and political business cycles was first analysed by
Nordhaus (1975) and MacRae (1977). If the outcome of an election does not allow investors to immediately
assess the effect on a country‟s future, then each outcome constitutes an uncertainty including surprise.
3. History Of The Zimbabwe Stock Exchange [ZSE]
The Zimbabwe Stock Exchange is one of the largest capital markets in sub- Saharan Africa. However, with 81
listed companies, the ZSE has more depth and diversity than some of the region‟s markets. The stocks on the
exchange include financial, insurance, retail, construction, transport, pharmaceuticals, property,
telecommunications, manufacturing, mining and agricultural-related stocks. There are currently two indices
on the Stock Exchange; the Mining Index with 4 companies and the Industrial Index comprising of 77
companies. The indices are calculated using a 19 February 2009 base date and are weighted by market
capitalization.
The Industrial Index is dominated by price movements in a few big cap stocks such as Delta which represents
20% of the index, Econet (19%), Innscor (8%), SeedCo (6%) and Hippo (5%) ZSE (2012). Presently trading
is by call over, using an open-cry floor system on a matched bargain basis. This trading system is paper based
and settlement is on a T+7 bases against physical delivery of scrip (seven day settlement for both shares and
payment). Share dealing is done through stockbrokers once a day, from Monday to Friday. The call over
session commences at 10.00 hours and ends at 1130 hours. The financial instruments traded on the ZSE are
common stock, preference shares, corporate debentures, warrants, government stocks and fixed interest
securities. However, the bulk of trades and listings on the exchange are for common stock.
www.researchjournali.comResearchjournali’s Journal of Finance
Vol. 2 | No. 4 April | 2014 ISSN 2348-0963
6
Foreign participation in stock market trading was introduced in mid-1993, following the partial lifting of
exchange control regulations. Foreign investors may hold up to 10% of any listed company without recourse
to Exchange Control. Collectively foreign ownership in a listed company may not exceed 40% of the issued
capital of that company. These rulings exclude holdings which were acquired before June 1993.
This study concentrates on the pre-election and post election during the 31st July 2013 elections and test the
impact of the political dynamics on the returns of the ZSE index. The key question is to investigate how
much the ZSE is influenced by a political event such as the presidential elections.
4. Data, Methodology and Results
In this paper, daily closing prices of the ZSE General Price index are used to calculate daily returns. The time
period includes data from 6 February 2013 to13 September 2013. It considers data from both periods of the
ZSE before and after the Presidential elections. All the data information were obtained from the ZSE
database.
Daily share returns for the ZSE General index are estimated to the following identity;
Rit = Ln (Pit / Pit -1) (1)
Where Rit is the actual return on share I on day t, Pit is the price of share I on day t, Pit-1 is the price of share
I on day t-1. Logarithmic returns are preferred because they are theoretically better when linking together sub-
period returns to form returns over longer periods (strong, 1982).
Abnormal returns are calculated using the adjusted market return model;
ARit = Rit – Rm (2)
Where this daily market adjusted return will be taken as the daily percentage raw on a stock minus the daily
percentage market return for the corresponding trading period.
The next step was calculating the weighted average market adjusted return in event day t as follows;
ARt = ∑ (ARi,t) (3)
and cumulative abnormal adjusted returns is measured lastly as CAR = ∑Art (4)
www.researchjournali.comResearchjournali’s Journal of Finance
Vol. 2 | No. 4 April | 2014 ISSN 2348-0963
7
5. Empirical Results
Fig 1: Volume Analysis
120,000,000
100,000,000
80,000,000
volumes
60,000,000
40,000,000
20,000,000
Series1
0
02-Aug-13
04-Aug-13
06-Aug-13
08-Aug-13
10-Aug-13
12-Aug-13
14-Aug-13
16-Aug-13
17-Jul-13
19-Jul-13
21-Jul-13
23-Jul-13
25-Jul-13
27-Jul-13
29-Jul-13
31-Jul-13
dates
The Zimbabwean bourse suffered low trading volumes as the nation approached the election date on the 31 st
of July 2013. This is indicative of the uncertainty that was existent in the stock market during this period of
elections. This supports the findings by Jensen and Schmith (2005) that found significant Presidential
candidate impacts on stock returns and volatility in the Brazilian election of 2002. In addition, these findings
are also in agreement with the conclusion by Pontzalis, Strangeland and Turtle in their study of the behavior
of stock market indices across 33 countries were they presented evidence indicating that elections do impact
stock markets across their sample countries.
Also, the same findings by Bialkowski et al (2009) of a strong relationship between political elections and
stock movements across the globe were evident in this study. As we move towards Presidential Election Day,
we would expect the market to be more nervous and perhaps downward-bound, with limited transactions
owing to uncertainty about the results.
Fig 2: Cumulative Abnormal Return for event window
25.00%
20.00%
15.00%
CAR
10.00%
5.00% CAR
0.00%
17-Jul-13
19-Jul-13
21-Jul-13
23-Jul-13
25-Jul-13
27-Jul-13
29-Jul-13
31-Jul-13
02-Aug-13
04-Aug-13
06-Aug-13
08-Aug-13
10-Aug-13
12-Aug-13
14-Aug-13
16-Aug-13
Date
www.researchjournali.comResearchjournali’s Journal of Finance
Vol. 2 | No. 4 April | 2014 ISSN 2348-0963
8
The event window was 21 days stretching 10 days prior and 10 days after the election event. Though positive,
cumulative abnormal returns are on a downward trend around the elections are widely watched events by
stock markets as they react to information as it infiltrates the markets. This was also found out by Nippani and
Medlin 2002, were they came out with findings that elections are widely watched events by stock markets and
that election results impact the performance of the market.
Fig 3: Cumulative Abnormal profits for sample
25.00%
20.00%
15.00%
10.00%
CAR
5.00% CAR
0.00%
-5.00%
-10.00%
DATE
As noted in Fig 3, the stock market experienced negative cumulative abnormal returns especially during the
month of February to April 2013 as they was a lot of speculation as to when the Presidential elections were
going to be held. A lot of uncertainty surfaced within the market. The negative to low abnormal cumulative
returns prior to the election reveal the high levels of uncertainty in the market. However, when the President
declared the date of elections, this uncertainty was reduced. As the nation approached the 31st July election
date, the market dampened facing great losses in trading volumes and uncertainty of which presidential
candidate would win the elections.
5. Conclusion
This study intended to shed more light on the impact of the 2013 Zimbabwe Presidential elections on the local
bourse. Abnormal returns were analyzed across all the sectors represented on the ZSE. The period preceding
the elections faced low trading volumes, negative to low cumulative abnormal returns. This strongly supports
the efficient market hypothesis that as new information or events happen, the stock prices immediately adjust
to such information. When it became clear that Presidential elections were to be held in 2013, the stock
market was bearish especially in the estimation period and pre-event period as investors speculated on the
www.researchjournali.comResearchjournali’s Journal of Finance
Vol. 2 | No. 4 April | 2014 ISSN 2348-0963
9
actual date of the elections. However, in the post event period, cumulative returns were on the increase due to
reduced uncertainty and speculation in the market.
6. References
1. Bialkowski J, Gottschalk K and Wisnicwski T (2007), Political Orientation of Government and Stock Market Returns, Applied
Financial Economics letters, Vol % , No 4 pp269-273.
2. Bialkowski J, Gottschalk K and Wisnicwski T (2008), Stock Market Volatility Around National Elections, Journal of Banking
and Finance, Vol 32, No 9 pp 1941-1953.
3. Brander J (1991), Election Polls, Free Trade and the Stock Market: Evidence from the 1988 Canadian General Election,
Canadian Journal of Economics, Vol 24 pp 827- 842.
4. Brown S J and Warner J B (1985), Using Daily Stock Returns: The Case of Event Studies, Journal of Financial Economics, Vol
14 pp 3-31
5. Ejara DD, Nag R and Upadhyaya K P (2012), Opinion Polls and the Stock Market: Evidence from the 2008 US Presidential
Election, Applied Financial Economics, Vol 22, No 6 pp 437-443.
6. Gwilym O and Buckle M (1994), The Efficiency of Stock and Opinion Markets: Tests based on the 1992 UK Opinion Polls,
applied Financial Economics, Vol 4 pp 345- 354.
7. He Y, Lin H, Wu C and Dufrene UB (2009), the 2000 Presidential Election and the information Cost of Sensitive versus Non
Sensitive S & P 500 stocks, Journal of Financial Markets , Vol 12 No. 1pp 54-86
8. Herron M C, Levin J et al (1999), Measurement of Political Effects in the USA economy; a study of the 1992 Presidential
Election, Economics and Politics, vol 11, no. 1 pp 51-81
9. Huang R D, Common Stock Returns and Presidential Elections, Financial Analyst Journal, Vol 41 No 2,Pp 58-61.
10. Knight B G (2007), Are Policy Platforms Capitalized Into Equity Prices? Evidence from the Bush/Gore 2000 Presidential
Elections, Journal of Political Economics, Vol 91, no.1/2 pp 289-402.
11. Leblang D (2000), Politics and Markets: The Stock Market and the 2000 Presidential Election, Working Paper, University of
Colarado, Boulder Co.
12. Leblang D and Mukherjee B (2005), Government Partisanship, Elections And The Stock Market: Examining American and
British Stock Returns, 1930 -2000, American Journal Of Political Science, Vol 49 Pp 780 -802.
13. Manning D N (1989), The Effect of Political Uncertainity on the Stock Market: The Case Of British Telecom, Applied
Economics, Vol 21 pp 881 -9.
14. Niederhoffer V,Gibbs S And Bullock J (1970), Presidential Elections And The Stock Market, Financial Analyst Journal, Vol 26
No 2, Pp 111-113
15. Pastor L and Veronesi P (2012), Uncertainity about Government Policy And Stock Prices, The Journal Of Finance, Vol 67 No.4,
Pp 1219-1264.
16. Roberts B E (1990), Political Institutions, Policy Implications and the 1980 Election: A Financial Market Perspective, American
Journal Of Political Science, Vol 34, Pp 289-310.
17. Steeley J M (2003), Making Political Capital; The Behavior Of The UK Capital Markets During Election „97‟, Applied
Economics, Vol 21pp 881-9
18. Thompson R and Ioannidis E (1987), The Stock Market response to Voter Opinion Polls, Investment Analyst, Vol 83 pp 19-22.
www.researchjournali.comYou can also read
