THE BEHAVIOUR OF STOCK RETURNS AND VOLATILITY AROUND ELECTIONS: EVIDENCE FROM COLOMBO STOCK EXCHANGE

Abstract

The study examines the behavior of stock returns and volatility of returns in CSE around both Presidential and Parliamentary elections. Based on daily data during the sample period January 1985 through September 2009, a univariate GARCH model with return and volatility dummies is employed for estimation. The study produces mixed results as for the abnormal returns and change in returns relative to the previous day‘s returns during election periods. However, there exists strong evidence for upward movement of the volatility of returns around elections. This result is consistent for both Presidential and Parliamentary elections. Based on comparisons, the study also suggests that the negligence of conditional heteroskedasticity in estimation may result in failures in capturing the impact of elections on stock returns.

Key Words: Stock returns, Volatility, Elections, GARCH Models

For full paper: fmscresearch@sjp.ac.lk