Election Results and the Indian Stock Market: Exploring Efficiency and Volatility Patterns (2004-2019)

Abstract

This research delves into the significant role of the Indian stock market in shaping the country's economic landscape and explores the influence of political events, particularly general election results and exit polls, spanning the period from 2004 to 2019. The primary objective of this paper is to meticulously analyze how these political occurrences can potentially affect the performance of the Indian share market. To achieve this, the study employs the event study methodology and focuses on a diverse sample of 112 companies representing 33 different sectors.

By calculating abnormal returns through a meticulous contrast of actual returns with anticipated returns based on the Capital Asset Pricing Model (CAPM), the paper employs a t-test to ascertain the statistical significance of the findings. For the election results, the analysis window extends from t = -100 to t = +100, where t = 0 corresponds to the date of announcement. In addition, the study employs GARCH and ARCH models to uncover potential volatility patterns. While observing an ARCH effect in both the 2004 general election results and exit polls, the study does not find substantial evidence of a spillover effect of risk.

The empirical findings present a compelling case that alterations in the political party in power wield a more pronounced impact on the market compared to the re-election of the same party. A noteworthy instance lies in the 2014 elections, wherein an unexpected change in the governing party led to investors accruing abnormal profits a mere seven days after the announcement date. This intriguing phenomenon brings to light a significant positive effect resulting from such announcements, thereby challenging the tenets of the efficient market hypothesis.