Political and the Dow Jones Industrial average indices fell

Political events have a big
influence on the financial market. Because of political decision making new
information becomes available. The financial markets try to incorporate this
information in the stock prices. The presidential election is a unique event,
since after the election the voters have no more influence on the decision
making in politics. Therefore it is interesting for investors to keep an eye on
these political events and the results.The 58th
quadrennial American presidential election, which was held on November 8 2016,
was won by the republican candidate Donald John Trump. By beating the
democratic presidential candidate Hilary Clinton, Donald Trump became the 45th
president of the United States of America. The outcome of the 2016 election is
viewed as one of the most shocking outcomes in modern political history. Since
Donald Trump, a business man and a reality television star who has no
government experience, defeated the former secretary of state. Trump ran a
controversial campaign that focused on immigration control and included among others
building a wall along the United States border with Mexico and a proposal to
ban Muslims from entering the United States. He also made comments about
withdrawing from several trade and international agreements like the Trans
Pacific Partnership(TPP), NAFTA, the Paris Climate Accord, The U.S.-Cuba deal
and NATO. Since being elected Donald Trump has made progress or successfully
fulfilled withdrawment or adjustment of most of these agreements and comments. On the night of the election,
as the results came in, the markets went wild. Futures for the benchmark
S&P 500 and the Dow Jones Industrial average indices fell more than four
per cent(Kiersz, 2016). The stock markets recovered quickly and since the
election of Donald J. Trump the S&P 500 has performed exceptionally well.
Between the election of Donald J. Trump on November 8th 2016 and
September 2017 the S&P 500 has added 2.04 trillion dollars in market value (Imbert,
2017). The presidential election of
the United States is a large world event. The election outcome could change
trading regimes, since the president can alter import tariffs as well as cancel
trade agreements without much intervention from the US Congress. Also the
United States of America is one of the biggest countries in the world
concerning import and export. Since the current literature about the effect of
elections on market indexes their return and volatility focuses mainly on the
domestic market this thesis will be focused on the effect of the U.S. election
outcome on the economy of the countries with a strong trade-relationship with
the United States.For investors it is important to know how the markets respond to certain
events, so they can alter their trading strategy. This thesis will try and answer the following
question:Do the political elections in the
United States of America have an abnormal effect on the market index return of
the current top trade partners of the U.S.A.?In this study the daily stock returns of the thirty current top trade
partners of the United States will be used. The top trade partners are selected
by their total amount of export to the United States. Following MacKinlay(1997)
an event study will be used to investigate if cumulative abnormal returns of
market indexes of the top trade partners are significantly different from zero
at election day. After the event study a cross-section analysis will be
conducted to research which factors influence the cumulative abnormal returns. This thesis is organized as following. Section 2 will discuss relevant
literature. Section 3 will explain data used for this study. Section 4 covers
the methodology. In section 5 the results will be stated and discussed. And
finally section 6 will cover the conclusion and additionally the limitations of
this research and suggestions for further research.   

 Literature reviewThis section will cover
existing literature about the relationship between political events and market
indexes. Following this literature several hypothesis will be formed.             Huang(1985) researched the pattern of
common stock returns over the four year election cycle as well as over
different administrations. Their research shows a strong pattern in the four
years of the election cycle. The existence of an election cycle is much more
apparent when combined returns are shown between the first and second year and
the third and fourth year. The combined return is notably higher in the third
and fourth year compared to the combined first two years of the election cycle.
The pattern is especially large in the most recent 20-year period of their
research, were the annual difference is exceeding 24 per cent(Huang, 1985).            F. Siokis and P. Kapopoulos(2007)
examined if the movements of stock prices in a small open economy could be
partly explained by the dynamics of the political environment. They researched
the stock market of Greece by using the ASE index. In their paper they
confirmed previous findings of the importance of political events in explaining
the behavior of the stock exchange. They found evidence of both partisan and
electoral effects on the prices of stocks, especially in the in period from
1988 till 2004(F. Siokis and P. Kapopoulos, 2007).            A.F. Herbst and C.W. Slinkman(1984)
found strong support for a four year political-economic cycle. Their results
also showed the existence of a two year cycle, although it did not peak during
the election date and therefore is not labeled as a political cycle.Based on multiple studies where political cycles are
found the following hypothesis is formed: The
cumulative average abnormal returns in the period surrounding the election will
be non-zero for the thirty top trading partners. This can be expressed as
following:H0: CAAR = 0H1: CAAR ? 0            Niederhoffer
et al. (1970) found evidence for the traditional Wall Street view that the
market prefers republicans. Their results showed significant rise in the Dow
Jones Index the day following a republican victory. After a republican victory
the Dow Jones Index on average rose by 1,12 per cent, while the Dow Jones Index
on average fell by 0,81 per cent following a democratic victory. This is also
the case for the first month following the election(Niederhoffer, et al.,
1970). A more recent research of Huang(1985) contradict the
finding of Niederhoffer et al.(1970). They found evidence against the myth that
markets prefer a republican administration over a democratic administrations.
The results obtained in the research didn’t show any significant difference
between the two administrations in four out of the six cases. Although for the
two periods with a significant difference both showed higher returns for a
democratic administration.  Also research
of for example Allvine and O’Neill(1980) and from Santa-Clara and Valkanov(2003)
have found that the election of a democratic administrations predicts positive
stock market returns. Based on these finding the following hypothesis is
cumulative abnormal return in the election period will be higher when a
democratic administrations is elected. Which can be expressed as following:H0: ?2 = 0H1: ?2 > 0            In
the research of Bialkowski, et al.(2006) is found that one of the factors that
effects the stock market volatility is a change in political regime. According
to their findings the volatility of stock prices rises when the political
orientation of the elected administration changes. The model made by Pastor and
Veronesi(2012) confirms the results found by Bialkowski, et al.(2006) that
stock prices should fall when there is a change in government policy, which can
be assumed when there is a change in political administrations. Following this
knowledge the following hypotheses is formed:A change in the political orientation because of the election will
result in lower cumulative abnormal returns. H0: ?3= 0H1: ?3

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