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The Impact of Presidential Election on Taiwan's Stock Market- Prospect Theory

Tsang-Yao Chang, Chi-Wei Su, Hsu-Ling Chang, and Hsiao-Ping Chu
2006 / 05
Volume 13, No.1

pp.87-118
10.6612/tjes.2006.13.01.87-118

Abstract

The purpose of this study is to investigate the impact of presidential election on Taiwan's stock market. On March 22, 1996, it was the first time in Taiwan to vote the president directly. We used prospect theory to explain whether presidential election has impact on the stock market. The ruling party may win the election by manipulating the stock market. In this research, we examine whether the presidential elections would be interfered by ruling party by using the GJR-GARCH model. The evidence indicates that the stock market exits significant and positive impact three months before presidential elections. Because of the China military maneuvers pressure, the bullish market is offset by bear market. We don't find any significant impact one month before elections. When the outcome of the elections is clear, the return of stock market is positive and significant one month after presidential elections. The empirical result shows that parts of the individual stock does exist presidential election effect.

Keywords

presidential election effect

prospect theory

GJR-GARCH model