Kathmandu University School of Management

Pincche Tole, Gwarko, Lalitpur

Term Paper on
"Effect of Prime Minister K.P Sharma Oli's sworn in ceremony on
Stock Market Returns"

Submitted To
Mr. Niranjan Phuyal
Course Instructor

Submitted By: Group 3

Ujwal Karn (19315)
Roshni Thapa Magar (19317)
Utsav Raj Pant (19324)
Rohit shah (19327)

MBA fourth Trimester

Submission Date: May 15, 2020

 Contents
Introduction................................................................................................................................1

Purpose of the Study..................................................................................................................2

Review of Literature..................................................................................................................2

Efficient market hypothesis....................................................................................................2

Event studies..........................................................................................................................2

Abnormal Returns..................................................................................................................3

Political Events and Stock Prices...........................................................................................3

Sample selection and Time Parameters......................................................................................4

Test Model.................................................................................................................................4

Presentation of results................................................................................................................6

Interpretation of Results.........................................................................................................6

Mean Difference of Returns (-10, +10 days).............................................................................7

Abnormal Returns for (-10, +10 days).......................................................................................8

Discussion and Analysis..........................................................................................................10

Conclusion................................................................................................................................11

References................................................................................................................................13
 Abstract
This study was conducted to analyze the abnormal returns of five commercial banks
of Nepal: (NABIL, KBL, PCBL, MBL, GBIME )and NEPSE index return due to
announcements of new political event i.e. sworn in of prime minister KP Sharma Oli.
Political events like sworn in of Prime Minister Affect the stock market return and also
generate a positive or negative wealth effect for shareholders. The purpose of this study is to
investigate whether prime minister KP Sharma Oli sworn has generated abnormal returns
for five selected banks and NEPSE Index. Event study methodology had been used to
examine whether there is a presence of abnormal returns associated with political events,
and the P-value model was estimated to test the hypotheses. Based on the analysis of
findings, it is found that the Nepalese stock market is inefficient at a semi-strong level
indicating, the existence of abnormal returns due to information of Prime Minister KP Oli's
sworn in. Hence semi-strong market efficiency does not hold in the Nepalese stock market as
there is a relationship between political events and abnormal stock returns.

Introduction
Nepalese capital market reflects some abnormal characteristics that differentiate it
from that of the market of developed countries. Nepalese capital market is identified as
having limited size in terms of amount and number of securities-trading, a few market
participants, a lack of professionalism, and a preliminary stage of market growth. To evaluate
the stock return from the market, no investors can gain an abnormal return if the market is
efficient (Fama, 1998). The market efficiency requires that security prices instantaneously
and fully reflect all available relevant information.
According to the banner Anoraga and Pakarti (2006) information is an important
element for investors and businesses. Information which may affect market behavior can be
either good news or bad news. According to (Mensi et al., 2016), one form of information,
which may affect stock price return, is a political incident and its announcement. Each
political change causes risk and impacts the capital markets (Kirikkaleli, 2020) with the
market reaction often being negative. In the case of Nepal, the Prime minister and his
ideologies play a powerful role in determining the direction of the stock market. For an
efficient market hypothesis to hold, Nepalese stock price should reflect the political incidents
according to the semi-strong form efficiency which states that stock prices react so fast to all
public information and no investor can earn an abnormal return after the announcement is
made. To examine the efficiency of the market this study undertakes Prime Minister KP

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Sharma Oli's sworn in ceremony held on Feb 15, 2018, as a political event under this study
and analyzed its effects on the returns of stocks and NEPSE index.

Purpose of the Study

The objective of this study is to analyze the cumulative abnormal returns (CAR) of
five selected commercial banks and NEPSE index before and after sworn in of Prime
Minister KP Sharma Oli held on Feb 15, 2018.
Following objective is taken for the study:
 To find out the effect of political events on Cumulative abnormal stock market
returns.

Review of Literature
Efficient market hypothesis
The Efficient Market Hypothesis (EMH) is based on the assumption that, inefficient
markets, asset prices fully reflect all available information. Thus, any change in equilibrium
prices will reflect the flow of information available to market participants (Simões et al.,
2012). It, therefore, becomes impossible to make excess returns on this information. Malkiel
(2003) points out that, no system could be devised to enable abnormal returns to be obtained
if one accepts that market equilibrium conditions are translated into expected returns and that
these are formed based on the available information. There are equally situations whereby
regularities detected in the market, would indicate inefficient information flow leading to a
need to formulate a system to enable participants to obtain abnormal gains. According to
Fama (1970), there exist three forms of market efficiency: weak form- trading on past trend;
semi-strong form- trading on publicly available information and past trends; and strong form-
trading on any information which may be public or private (Roberts, 1967). Thus using the
event studies, statistical evidence is being derived from the fact that market prices do not
immediately adjust to new information, and therefore tries to identify abnormal returns
surrounding the political events.

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Event studies
Event studies measure the stock price reaction to an unanticipated announcement of
an event, event studies are used to test that market incorporates this new information
efficiently and are therefore used to determine the effect of the event on the value of investors
(Binder, 1998). Jogiyanto said that the event study can be used to test the content of the
information (information content) of an announcement and can also be used to test the semi-
strong form of market efficiency.
Abnormal Returns
According to Hartono (2003: 433) in Edi Boediono (2009), the abnormal return is the
excess of the return actually happens to return to normal or also called excess return.
Abnormal return occurs because investors’ returns obtained as expected. The difference
happens to be a positive return if the return is obtained greater than the expected return or
return is calculated. While the return will be negative if the return is obtained is smaller than
the expected return or return is calculated.

Political Events and Stock Prices

Mahmood et al. (2014) investigated the impact of political events on the stock market
in Pakistan, using the KSE and concluded that political events make the KSE more volatile
for a short period (maximum of 10-15 days). Mukhejee and Leblang (2007) investigated the
link between diplomat’s policies, rate of interest, and rise and fall in stock prices in the USA
and UK. It was observed that investors hope for high-interest rates when the Democratic and
labor parties are on government benches in the USA and UK, respectively. On the other hand,
trading communities anticipate low-interest rates when the Republican Party and conservative
party are ruling in both the USA and the UK. Huang (1985) and Lobo (1999) investigated the
effects of political risk element “elections” on stock returns. It was realized that stock returns
were negative in the election year and positive in the preceding years. It was also discovered
in the study that stock volatility was very high during the period. As a result, elections were
an important source of uncertainty as a political risk factor for the stock market. Roberts
(1990) performed a regression analysis of the impact of the presidential election outcome in
1980, and the victory of the Republican candidate Ronald Reagan on the price movements of
military company stocks, concluding that there was a positive effect on stock prices.
Chan and Wei (1996) researched into the effect of political news in Hong Kong on the
stock market volatility by using the GARCH model: reliable shares represented by the Hang
Seng Index and Chinese shares were represented by the Red-chip Index, 44 Global Journal of

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Management and Business Research Volume XVII Issue V Version I Year 2017 Global
Journals Inc. (US) C Using Event Studies to Evaluate Stock Market Return Performance
respectively. It was discovered that the volatility of the shares in both indexes increase
corresponding to political news. There was the existence of a positive relationship between
the positive and negative political news and the Hang Seng Index returns, whereas there was
not any relationship between political news and the Red-chip Index returns.

Sample selection and Time Parameters

Five Commercial banks are selected to test the effect of Prime Minister Kp Oli's sworn in on
their stock returns. The banks are, Nabil bank, Kumari bank limited, Global IME bank
limited, Century commercial bank and Machhapuchre bank limited. These banks are selected
using a convenience sampling method. The time parameter for event study includes the event
window and pre-post event period. The event window represents (+-) 10 days from the event
data (Feb 15, 2018). The estimation period includes data of returns of stocks, 6 months prior,
and after the occurrence of an event. The schematic diagram is given below:

Event Window

Pre estimation Window Post estimation Window

(6 months before -10 days +10 days (6 months after event)
event)

Event Date: Feb, 15, 2018

Test Model
The first step requires that datasets of share prices for the relevant dates, for each of
the acquiring firms and the index to be studied were collected. In carrying out an event study,
there is often a need for researchers to look at returns and not the direct share prices. Thus the
share prices were transformed into natural logarithm returns and this was transformed using
the formula below:
Rt = LN (Pt / Pt-1) (1)
Where: P is the observed price; Subscript t refers to time t; Pt is the current price; and
Pt-1 is the price of the previous trading day. We try to figure out what the return would have
been if the acquisition news hadn’t been released. Thus the expected return is predicted by
using a simple regression analysis, where the parameters are defined in the estimation period,

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consistent with an equilibrium model which is the market model procedure (MacKinlay,
1997) widely used as a benchmark in event studies. A market model is a statistical model that
relates stock returns to the return of the market portfolio which is the index. According to
Strong (1992), the market model makes no explicit assumption about how equilibrium
security prices are established and it instead assumes that returns are generated according to a
given mechanism
[E(Ri, t) = αi,t + βi, jRmt]. (1)
Therefore the simple regression is run using the returns on a given stock i and the returns of a
stock market index m. The market model is given as:
E(Ri, t) = αi,t + βi, just (2)
Where: E(Ri, t) is the expected return at time t, αi and βi are parameters of the regression
equation. βi is the stock’s Beta value (slope), αi is the Jensen alpha, and Rmt is the daily return
on a stock market index (m) at time t. In an event study, the measurement of abnormal return
(AR) is often required to appraise the event’s impact. Also, a benchmark for normal returns is
required in order to test for the existence of AR which is defined as the difference between
the actual observed return on the stock sample, i and the predicted normal returns, E(Ri, t), for
each day of the event period
(Seiler, 2003). Thus AR were calculated using the approach known as risk-adjusted return
and measured over the event window on stock prices of selected firms. Therefore, the
abnormal return of a stock i at time t is given as equation (3).
ARi, t = Ri, t - E(Ri, t) (3)
Where: ARi, t is the abnormal return; Ri, t is the actual return on stock, i; and E(Ri, t) is the
expected return. Looking through most of the event studies carried out by researchers,
abnormal returns are accumulated over a given number of periods. This is often done
probably in order to accommodate uncertainty over the exact date of the event or to fully
capture the effect of an event on share prices. The cumulative abnormal return (3) for security
i is computed as the sum of abnormal returns in a given time period (5,1) , (1,5), (0,1), (2,2)
and (1,5). Then the Average of all the CAR is calculated. To test the significance of CAR, t-
statistic is used. The p- values of less than 0.05 indicates the significance of event on stock
returns.

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Presentation of results
Given the nature of an efficient market, it is impossible to make abnormal returns by
trading on past trends, publicly available information, or any other private information. Thus
if there are no unusual movements in the stock returns around the event, then it’s obvious that
the Cumulative abnormal returns (CAR) will be fluctuating around zero which means the
Prime minister's sworn in hold no information. If the CAR during the event window
fluctuates highly then this indicates prime minster KP Oli's sworn in to hold some
information. The T- statistic represents the size of difference relative to the abnormal returns
during the event window. Higher the magnitude of T, greater would be evidence suggesting
abnormal returns during that period. Similarly, P-value less than 0.05 indicates the
significance of Prime ministers sworn in on the returns of the stock indicating the traders
would have gained if they have traded during the event window.
Table 1: Cumulative Abnormal Return (CAR) during the event window
Stock Cumulative Abnormal T-Statistics P-Value Significance
Return (CAR)
Nabil Bank 1.50% 2.82755 0.00234 Significant

Kumari Bank 4.04% 4.56162 0.00000 Significant

Limited (KBL)
Prime Commercial 1.51% 2.2677 0.01167 Significant
Bank (PCBL)
Machhapuchre -2.45% -2.8012 0.00254 Significant
Bank Limited
(MBL)
Global IME Bank 0.55% 0.70836 0.23936 Not Significant
Limited (GBIME)

NEPSE Index -0.71% -1.8963 0.02895 Significant

Interpretation of Results
Table 1 above illustrates the CAR values and t-statistic over the test period [-10, +10]
days of KP Oli's sworn in. Among the five selected commercial banks, all banks except
Global IME bank's CAR are significant. As the CAR of NABIL, KBL, PCBL, and MBL are
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significant, this means the CAR for these stocks fluctuated highly during the event window.
For NABIL, the CAR is 1.50% meaning the NABIL unusual stock return due to prime
ministers sworn in would be 1.50%. Similarly, for KBL and PCBL, the unusual stock return
due to prime ministers sworn in would be 4.04% and 1.51%. This means the event has caused
the fluctuations in the returns of these stocks. The abnormal returns significance is not found
for GBIME.
Similarly, looking at the CAR for the Index return during the event time, the p-value
is found to be 0.02895 which indicates the impact of prime ministers sworn in on the stock
market as a whole is significant. Due to the event, the market return has declined by 0.71%.
Therefore this means that there is a significant Abnormal returns in the stock market when
the prime minster KP Olis sworn in is made. Looking at the findings on Induvial stocks and
NEPSE index, the presence of abnormal returns is found indicating the reaction of investors
to the political events like Prime ministers sworn in.

Mean Difference of Returns (-10, +10 days)

Table 2: Difference of Average daily return before and after the event
Stock Average Return before Average Return Mean
Event After Event Difference
Nabil Bank Limited 0.15% -0.29% 0.44%

Kumari Bank Limited -0.36% -0.20% -0.16%

Prime Commercial Bank 0.06% -0.36% 0.43%

Limited
Machhapuchre Bank -0.19% -0.96% 0.77%
Limited
Global IME Bank 0.19% -0.43% 0.62%
Limited
NEPSE Index -0.10% -0.69% 0.59%

Table 2, depicts the 10 days average daily return of the stocks before and after the
occurrence of Prime Minister KP Oli's sworn in. The mean difference is the difference
between average return before and after the occurrence of the event. The highest mean
difference is seen on MBL's Stock as the difference of 0.77% is found in average return
before and after the event. Similarly, GBIME, has a mean difference of 0.62%. For the
NEPSE index return, the mean difference of 0.59% is found which indicates the fluctuations
in the return after the occurrence of the event. For NABIL's Stock, the mean difference is

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found to be 0.44% which is followed by PCBL (0.43%) and Kumari Bank Limited (-0.16%).
The differences in the average return during the pre-event window and post-event window
indicates the fluctuations in the returns which may be caused due to various reasons. But the
significant changes in return just after the swearing-in of prime minister indicates the
influence of political event on the stock market which can be seen in findings of Table 1 also.
The efficient market theory hypothesizes that there should not be any fluctuations in
the average daily return of the stock prices around an event. However, the empirical finding
shows that the average stock return shows a significant decline in the stock prices of all the
companies under study as well as of NEPSE’s index after the sworn in date of prime minister.
This indicated that the investment behavior of investors in the Nepalese Stock market did not
confirm the characteristics of an efficient market. Since, significant changes in prices were
seen only after the sworn-in date i.e. after the information was bought to public knowledge, it
can be concluded that the Nepalese stock market is Inefficient Market as per EMH theory.

Abnormal Returns for (-10, +10 days)

Figure 1-5 illustrates the abnormal return of stocks before and after the occurrence of
the sworn in. For Kumari Bank Limited, Prime Commercial Bank limited and Machapuchre
Bank limited the abnormal returns after the sworn in are highly fluctuating. This indicates the
speculations made on prime ministers appointment by shareholders and investors. Figure 6,
shows the abnormal returns on the NEPSE index which shows the sharp decline in the index
just after the sworn in. This means the market has reacted to the sworn in event causing the
heavy fluctuations. The fluctuations on abnormal returns for different stocks and NEPSE
index before and after prime minster can be referred to in the figures below:

Figure 1: Abnormal Returns of NABIL before and after Prime ministers sworn in

1200.00% NABIL abnormal Returns

Daily Abnormal Retunr

1000.00%
800.00%
600.00%
400.00%
200.00%
0.00%
Event Date Feb 15

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 Figure 2: Abnormal Returns of KBL before and after Prime ministers sworn in

1200.00% KBL abnormal Returns

1000.00%
Abnormal Returns

800.00%
600.00%
400.00%
200.00%
0.00%
Event Date, feb 15

Figure 3: Abnormal Returns of PCBL before and after Prime ministers sworn in

PCBL abnormal returns

1200.00%
Axis Title

800.00%
400.00%
0.00%
Event Date

Figure 4: Abnormal Returns of MBL before and after Prime ministers sworn in

1200.00% MBL abnormal returns

1000.00%
Abnormal Return

800.00%
600.00%
400.00%
200.00%
0.00%
Event Date feb 15

Figure 5: Abnormal Returns of GBIME before and after Prime ministers sworn in

GBIME abnormal returns

1200.00%
Abnormal Return

1000.00%
800.00%
600.00%
400.00%
200.00%
0.00%
Event Date, Feb, 15

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 Figure 6: Abnormal Returns of NEPSE index before and after Prime ministers sworn in

NEPSE, Abnormal return

Abnormal Return

1200.00%
800.00%
400.00%
0.00%
Event Date feb 15

Discussion and Analysis

A vastly ignored but important factor in this discussion is the role of investor
sentiment in moderating the relation between political cycles and stock market returns.
Naturally, the political event invokes a degree of sentiment in an investor, with the valence
depending on whether the investor's political affiliation is the same as the sitting political
party or not, and for a politically unaffiliated investor, their sentiment may depend on their
perceptions of the macroeconomic growth potentials of the fiscal and regulatory policies of
the sitting political party. Malcolm and Wurgler (2006), suggests that investor sentiment
has a significant role in determining asset prices. Thus a second channel through which the
political event affects stock market returns may be through the effect on investor sentiment.
Research in behavioral finance identifies that investors are subject to sentiment and investor
sentiment is a significant factor in asset pricing. The behavioral finance literature has
various proxies for investor sentiment. Some of the behavioral finance biases/ proxies
caused by political events; in this report the election of Mr. K.P. Sharma Oli as Prime
Minister of Nepal; are discussed below.
Pessimism bias
Pessimism bias is the overestimation of the probabilities and harmful effects of
negative future events. This bias is important to understand when considering the public
perception of government. After the election of MR. K.P.Sharma.Oli, many investors might
have thought that Mr. Oli does not have efficient knowledge to effectively control the
economic front of the country. This pessimistic view on the ability of their newly elected
prime minister might have caused pessimism among investors.
Confirmation bias

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 Confirmation bias is the tendency to search for, interpret, favor, and recall
information in a way that confirms or strengthens one's prior personal beliefs or hypotheses.
It is a type of cognitive bias. People display this bias when they gather or remember
information selectively, or when they interpret it in a biased way.
Various empirical studies have proved the existence of confirmation bias existing in
the political events with stock returns. There is also a popular belief among investors around
the globe that the selection of candidates having a communist ideology is harmful for a
capitalist economy. Similar, confirmation bias among the individuals might have occurred
among Nepalese investors when they came to know that a candidate believing in communist
ideology is going to be the head of state.
Negativity bias
The tendency to put more emphasis on negative experiences rather than positive ones.
People with this bias feel that "bad is stronger than good" and will perceive threats more than
opportunities in a given situation. This leads to loss aversion tendency. The election of Mr.
Oli as prime minister might have triggered a negative sentiment among the investors due to
not very pleasant past experiences of communist prime ministers causing them to make
changes in the stock market trend.

Conclusion
The study investigates the effect of political events on 5 commercial banks’ as well
as NEPSE’s index return with the event being the sworn-in of Mr.K.P.Sharma Oli as Prime
Minister of Nepal.
In this study, we present links among political events, investor sentiment, and stock
market returns. First, we empirically examine the relationship between Prime Minister K.P.
Sharma Oli’s election and stock market return, and found that there is a significant effect of
the mentioned political events in some of the commercial Banks’ stock return and the
overall NEPSE’s index return. The estimation period of study was taken for 6 months
before and after the sworn in event whereas the test period from -10 to +10 days from the
sworn in event was taken in the study.
Seeing the share prices or stock returns, eventually gives an understanding of the
attitude of market participants on their perceptions of what is happening in the market. A
negative return will, therefore, imply that they have a negative feeling in the market while a
positive return depicts that participants have positive feelings or are being bullish about
market information. Using the market model for the analysis in this study, the results of the

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test statistics show that they are bearish and therefore had a negative feelings in the market
about the sworn-in news. Thus we reject the null hypothesis stated above and conclude that
the event of prime minister’s sworn in is significantly related to abnormal returns.
Similarly, the average return changes seen from 10 days before to 10 days after the sworn-
in event date shows that Nepalese stock market resembles Inefficient market as per EMH
theory since unusual average price changes were seen in all the companies under study only
after the event date when the information was bought to general public knowledge.
Several potential behavioral biases leading up to investor's sentiment to react to the
news have been identified. These behavioral biases were forms of cognitive biases usually
displayed by investors when analyzing unpleasant or demotivating cognition of a certain
past and current events or possible future events.

ANNEX: Calculation files are attached separately on excel file.

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Speculative Disasters. New York: Ticker Publishing.

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