Political Cycle and Stock Market - The Case of Malaysia

Abstract

The orchestration between the political cycle and the stock market behavior has been long found by many researchers. However, the research contexts of those findings usually do not cover the developing countries. Hence, it raises a question whether the political cycle is generalizable in the context of Malaysia. This paper examines the presence of a political cycle in Malaysia stock market returns and volatilities over the period of February 1982 to April 2012. Seven (7) general elections are covered in this paper. The political cycle is defined in terms of the effect of election information, Prime Minister and associated political instrument. Tests of equality, regression analysis and GARCH models are adopted to test each effect in order to come out with consistent output that is significant to discover the profound nature of a political cycle. Contrary to many previous researches findings of this study indicate the absence of a political cycle in Malaysia stock market returns. However, the presence of a political cycle in Malaysia stock market volatilities is statistically significant, in which this result is consistent with a number of previous studies. This result indicates that the investors take asymmetric treatments to the election information and the government policy. These findings might suggest investors a guidance to decide whether to enter or exit the stock market around the general election is going to take place.