The Impact of Parliamentary and Presidential Elections on Stock Returns in Colombo Stock Exchange (CSE)

A. M. C. P. Attapattua, P.S.M. Gunaratne

Abstract  

The research issue of this study is whether political events result in structural shift in stock return in CSE. The purpose of this study is to find whether there is a predictable pattern in the market and any structural shift in the market response to events of election announcements and release of election results. If a predictable pattern exists, the purpose is to identify any economically viable arbitrage strategies arising out of special pattern of market behavior in relation to events of election announcements and release of election results. To achieve this objective independent analytical devices are used in this research under event study methodology. According to the analysis of results, the formation of market sentiments in relation to election related events can be summarized as follows. If the announcement is taken place under a UNP dominant government, market seems to create negative sentiments around the events. However within few days of announcement market again gains the profit of the loss initially took place with the announcement. According to this speculative behavior, an investor who is having a prior knowledge about the announcement may sell the stocks well in advance of the election announcement in order to avoid subsequent losses taking place in the market. If the announcement is taken place under a SLFP dominant government, market seems to create positive sentiments around the events. According to this speculative behavior, an investor who is having a prior knowledge about the announcement may buy the stocks well in advance of the election announcement in order to sell and earn profit during the post event window. If a market friendly government comes to power with the release of election results, market seems to create positive sentiments, and if a less market friendly government comes to power market responses negatively.

Keywords: Market friendly government, Elections, Structural shift, Events