JRSSEM 2023, Vol. 02 No. 8, 1868 – 1883
E-ISSN: 2807 - 6311, P-ISSN: 2807 - 6494
DOI: 10.59141/jrssem.v2i08.414 https://jrssem.publikasiindonesia.id/index.php/jrssem
ELECTION UNCERTAINTY, ECONOMIC POLICY
UNCERTAINTY: AN EVENT STUDY APPROACH
Arni Utamaningsih
Politeknik Negeri Malang, Indonesia
*
e-mail: arni6965@polinema.ac.id
*Correspondence: arni6965@polinema.ac.id
Submitted
: February 21
th
2023
Revised
: March 16
th
2023
Accepted
: March 27
th
2023
Abstract: This study aims to analyze the impact of election uncertainty and economic policy
uncertainty on stock market performance in Indonesia using an event study approach. Data
obtained from the Indonesia Stock Exchange and the Central Bureau of Statistics during the 2010-
2021 period. This study uses the OLS regression model and event study analysis to measure the
impact of stock market performance on significant events related to election uncertainty and
economic policies. The research results show that the uncertainty of the election and economic
policies significantly affect the performance of the stock market in Indonesia. The impact is visible
in the period before, during and after the significant events related to the uncertainty. In addition,
the results of the analysis also show that elections and more stable economic policies tend to have
a positive impact on stock market performance. In conclusion, this study shows that election
uncertainty and economic policies have a significant impact on stock market performance in
Indonesia. Therefore, it is important for investors to pay attention to political and economic
conditions in making their investment decisions.
Keywords: Election Uncertainty; Economic Policy Uncertainty; Study Approach.
Arni Utamaningsih | 1869
INTRODUCTION
Political events that are taking place
in a country create uncertainty and are
very likely to have an impact on
economic stability in that country
(Alesina & Perotti, 1996). Political events
such as general elections, changes of
heads of state, changes of ministers in
the cabinet (reshuffle), political riots, and
various other political events tend to get
responses from market participants
(Ekman & Amnå, 2012) Market response
or reaction can be in the form of
fluctuations in stock prices in response
to a political event. An event has
information content that can be
assessed positively or negatively by
investors (Beaver, 1968). Changes in
stock returns due to changes in stock
prices are an indicator of market reaction
to information content (Aaker &
Jacobson, 1994).
This study examines the events of
President Joko Widodo's inauguration
on October 20, 2014, as Indonesia's
seventh president. The inauguration of
President Joko Widodo is a very
interesting political event in Indonesia
and became the motivation for this
study. Joko Widodo, who is very popular
as Jokowi was previously the governor of
DKI Jakarta, is a presidential candidate
from the Indonesian Democratic Party of
Struggle (PDIP). Joko Widodo is known
as a figure who is very pro-small people,
clean from bribes, and firm in making
decisions, thus giving great hope for the
people for a better future life. Joko
Widodo's popularity is thought to
improve capital market performance in
conducting stock transactions.
This event is often researched with
an event study approach. This event
study looks at price movements in 100-
day event windows. If an event increases
stock returns, then the event receives a
positive response from investors as a
picture of certainty in the market Aaker,
D. A., & Jacobson, R. (1994). In the
opposite case, investors will respond
negatively to an event that they value
poorly and result in a decrease in stock
returns, as a picture of uncertainty in the
market (Filis et al., 2011). Given the
preferences of different political parties
towards macroeconomic issues,
elections create policy uncertainty. The
5-day window event wants to test
market reaction shortly after Jokowi's
inauguration. The 100-day window
event period is a testing period for policy
uncertainty. (Ulupinar & Camyar, 2020)
stated that election uncertainty in the US
increases the cost of equity due to lower
investor demand for equity issuance.
This study examined 34 stock portfolios
on the Indonesia Stock Exchange. The
examination of 34 stock portfolios is the
latest issue in connection with research
into policy uncertainty in elections.
1. Hypotheses Development
This study examined the event of
the inauguration of President Joko
Widodo as president of Indonesia in 5
days and 100 days event windows. The
inauguration of Joko Widodo as
Indonesia's seventh president was an
interesting political event. Joko Widodo
1870 | Election Uncertainty, Economic Policy Uncertainty: An Event Study Approach
is known as a figure who is very pro-
small people, clean from bribes, and firm
in making decisions, thus giving great
hope for the people for a better future
life. Joko Widodo's popularity is thought
to improve capital market performance
in conducting stock transactions. If an
event increases stock returns, then the
event receives a positive response from
investors. In the opposite case, investors
will respond negatively to an event that
they value poorly and resulting in a
decrease in stock returns (Woolridge &
Snow, 1990). Stock market reaction to
strategic investment decisions. Strategic
management journal, 11(5), 353-363.
An event study is research that aims
to test the concept of an efficient market
(Bhagwat et al., 2020). Event study
methodology in the marketing literature:
an overview. Journal of the Academy of
Marketing Science, 45, 186-207. is
classified as an efficient market if no one,
both individual and institutional
investors, can obtain abnormal returns,
after adjusting for risk, using existing
trading strategies. In this case, the prices
formed in the market are a reflection of
existing information or stock prices have
reflected all available information
(Sujana, 2017). (Latif et al., 2011) said if
stock prices already reflect all currently
available information, then price
changes will reflect new information.
Event studies examine price changes
during the period an event occurs, and
can then conclude whether an event
contains valuable information or not by
predicting abnormal returns (Krivin et al.,
2003). The higher the abnormal return,
the greater the profit obtained by the
investor (Jacobsen, 1988).
This study developed a hypothesis that
is an investigation as follows:
Hypothesis I: There was a significant
average abnormal return (AAR) during
the event window due to the
announcement of Jokowi's presidential
inauguration.
Hypothesis II: There was a
significant average cumulative abnormal
return (CAAR) during the event window
due to Jokowi's presidential
inauguration announcement.
MATERIALS AND METHODS
The first step in an event study is to
determine the window length of an
event to obtain a trade-off of an event
(McWilliams et al., 1999). In particular,
the window should be able to capture
the stock price reaction of the total stock
trade, without distorted stock price
fluctuations caused by other causes. The
decision to determine the length of the
window is a subjective decision of the
researcher. The length of the window
may vary according to market conditions
and the events studied. (MacKinlay,
1997) says that usually event studies
determine the length of the window
around an event of interest to capture
market reactions in the time before the
event and after the event occurs
(Hirschey, 2021). Information leakage
can cause investor anticipation so that
they stop trading, so it is important to
define the trading day within an event
window.
The period used in this study is
during the 200 days of the president-
Arni Utamaningsih | 1871
elect's administration which is divided
into two periods, namely the period 5
and 100 days before and 5 and 100 days
after the event. If the research period is
described in the form of events, windows
will be presented as follows:
11 Juli 2014 20 Oktober 2014 28 Januari 2015
t-100 t0 t+100
The determination of the research
wheel was based on consideration of the
working days of the stock exchange
throughout the first 5 and 100 days of
the elected president's administration.
Saturdays, Sundays, and public holidays
are not taken into account, because on
these days the Jakarta Stock Exchange
does not operate, as well as Idul Fitri,
Christmas, and New Year holidays.
a. Data
The data used in this study is
secondary data which includes daily
stock prices, the Composite Stock Price
Index, Stock trading volume, and the
Number of shares traded every day
during the observation period. The data
sources used to collect the required data
are Indonesia Stock Exchange daily
report 2014-2015.
b. Data analysis is carried out in the
following ways:
1) Test JCI during event windows to
find out market tendencies.
2) Abnormal return of stock I on day t.
3) The expected return is calculated
using the Single Index Market
Model.
4) Daily Cumulative Abnormal Return
(CAR) of each share during the event
period.
5) The abnormal average return of all
stocks on day t.
6) Cumulative average abnormal
portfolio return (CAAR).
7) Standardized abnormal return t
distribution for portfolios.
8) The standard deviation of average
cumulative abnormal return (SCAR)
during the event period
9) Calculates the abnormal average
return of all stocks sampled before
and after the event.
10) Calculates the standard deviation of
the average return before and after
the event:
11) Calculates the statistical test t at
significance level = 5%.
12) Calculates the activity of stock
trading volume I in period t.
13) Calculates the average trading
volume activity of all stocks sampled
before and after the event.
14) Calculates the standard deviation of
the average return before and after
the event:
Calculates the statistical test t at
significance level = 0.05
1872 | Election Uncertainty, Economic Policy Uncertainty: An Event Study Approach
RESULTS AND DISCUSSION
The results of data testing are
displayed in the form of images.
Through image visualization, it will be
able to conclude stock price movements,
abnormal returns, and cumulative
abnormal returns. The picture can also
explain more concretely the condition of
each stock portfolio.
Figure 1 shows price movements 100
days before and 100 days after the
inauguration of President Joko Widodo
on October 20, 2014. The 100 days
before the inauguration date are
assumed to be the days that contain
political uncertainty that has an impact
on uncertainty in the capital market.
Composite stock prices that tend to fall
on the day before the inauguration
reflect uncertainty in the stock market. In
the 100 days following the date of the
president's inauguration, the composite
stock price tends to rise. Stock market
conditions after the inauguration date
reflect that stock market uncertainty can
be overcome, so investors can be
passionate about trading.
The composite stock price index
in the Indonesian capital market consists
of 34 portfolios. Each stock portfolio has
varied responses to political events that
contain uncertainty. The next section will
show variations in the abnormal return
and cumulative abnormal return of
several portfolios. The variation of
abnormal return and cumulative
abnormal return images is a description
of the response of each portfolio 100
days before and 100 days after the
inauguration of President Joko Widodo
as President of the Republic of
Indonesia.
Arni Utamaningsih | 1873
Agriculture
The stock price of the agricultural
portfolio is further processed and
produces abnormal returns and
cumulative abnormal returns. Figure 2
shows the tendency of cumulative
abnormal returns to fall to the lowest
point at the time of the presidential
inauguration. In this case, during times
of political uncertainty, the prices of
stocks in the agricultural sector tend to
be sluggish. The stock price of the
agricultural sector after the presidential
inauguration. Cumulative abnormal
returns tend to increase until the 100th
day after the presidential inauguration.
Mining
The stocks in the mining portfolio
showed significant differences between
before and after the events of the
presidential inauguration. Cumulative
abnormal returns tend to fall in the
period after the presidential
inauguration. This picture shows that the
stock price of the mining sector tends to
fall, in this case, investor interest in the
mining sector tends to fall.
1874 | Election Uncertainty, Economic Policy Uncertainty: An Event Study Approach
The next figure is a picture of
abnormal returns and cumulative
abnormal returns in the portfolio of
construction, food, textile, chemical,
cement, metal, manufacturing,
automotive, pharmaceutical, banking,
and credit. The visualization is a
condition of 100 days before to 100
days after the presidential inauguration
on October 20, 2014.
Construction
Food
Arni Utamaningsih | 1875
Textile
Chemical
1876 | Election Uncertainty, Economic Policy Uncertainty: An Event Study Approach
Semen
Metal
Arni Utamaningsih | 1877
Manufacturing
The stocks in the manufacturing
portfolio showed significant differences
before and after the presidential
inauguration. Cumulative abnormal
returns tend to fall in the period after the
presidential inauguration. This picture
shows that the stock price of the private
sector tends to fall. This picture shows
that investor interest in manufacturing
stocks is declining.
Automotive
1878 | Election Uncertainty, Economic Policy Uncertainty: An Event Study Approach
Pharmacy
Banking
Arni Utamaningsih | 1879
Credit
1880 | Election Uncertainty, Economic Policy Uncertainty: An Event Study Approach
Arni Utamaningsih | 1881
1882 | Election Uncertainty, Economic Policy Uncertainty: An Event Study Approach
DOI: 10.59141/jrssem.v2i08.414 https://jrssem.publikasiindonesia.id/index.php/jrssem
Description: **Significant at α 5%, df=3, one-tailed test.
Significant at α 1%, df = 3, one tailed test
Discussion
Presidential elections are political
events that generally have an impact on
economic issues. The preferences of
political parties carrying presidential
candidates vary on macroeconomic issues.
Such differences create policy uncertainty.
This study aims to examine the presence of
abnormal returns and cumulative abnormal
returns during the event window due to the
announcement of Jokowi's presidential
inauguration. The test was conducted on 34
stock portfolios that contribute to the
combined share price index. The test results
show that the composite stock price index
in the period 100 days before the date of
the presidential inauguration is a period of
uncertainty. The period 100 days after the
date of the presidential inauguration is a
more definite period, in which case the level
of uncertainty is overcome. Political
uncertainty can create policy uncertainty
and can increase the cost of equity
(Ulupinar & Camyar, 2020).
The 100-day period after the
inauguration of the president is a period of
the political contract to measure the
performance of the new government,
especially related to various policies
practiced. Pástor and Veronesi (2013)
suggest a relationship between market
predictions and political uncertainty and
financial uncertainty. The uncertainty that
occurs in sequence from stock prices in the
capital market, political turmoil that occurs
during the general election period, and
turmoil in the financial sector occur as a
result of various policies applied to various
sectors. The findings of Pastor and
Veronesi (2013) require deeper
examination using data from the
Indonesian capital market. This is in
connection with the findings of this study
after testing 34 stock portfolios
incorporated in the stock price index. The
results reported some abnormal returns
and cumulative abnormal returns of some
stock portfolios
CONCLUSIONS
This study examines political
uncertainty due to election events and the
inauguration of President Joko Widodo as
president of Indonesia on October 20,
2014. The study also examined the
uncertainty of policies implemented over
100 working days by the new
administration. The test was applied to 34
stock portfolios incorporated in the stock
price index on the Indonesia Stock
Exchange. This study has limitations, only
testing abnormal returns and cumulative
abnormal returns. Future research can be
developed by examining the capital
structure of companies affected by political
uncertainty, to provide a better
explanation. This research can be
developed by raising macroeconomic
issues related to policy uncertainty more
deeply for leading sectors during the
election campaign period.
Arni Utamaningsih | 1883
REFERENCES
Aaker, D. A., & Jacobson, R. (1994). The
financial information content of
perceived quality.
Journal of
Marketing Research
,
31
(2), 191–201.
Alesina, A., & Perotti, R. (1996). Income
distribution, political instability, and
investment.
European Economic
Review
,
40
(6), 1203–1228.
Beaver, W. H. (1968). The information
content of annual earnings
announcements.
Journal of
Accounting Research
, 67–92.
Bhagwat, Y., Warren, N. L., Beck, J. T., &
Watson IV, G. F. (2020). Corporate
sociopolitical activism and firm value.
Journal of Marketing
,
84
(5), 1–21.
Ekman, J., & Amnå, E. (2012). Political
participation and civic engagement:
Towards a new typology.
Human
Affairs
,
22
, 283–300.
Filis, G., Degiannakis, S., & Floros, C. (2011).
Dynamic correlation between stock
market and oil prices: The case of oil-
importing and oil-exporting countries.
International Review of Financial
Analysis
,
20
(3), 152–164.
Hirschey, N. (2021). Do high-frequency
traders anticipate buying and selling
pressure?
Management Science
,
67
(6),
3321–3345.
Jacobsen, R. (1988). The persistence of
abnormal returns.
Strategic
Management Journal
,
9
(5), 415–430.
Krivin, D., Patton, R., Rose, E., & Tabak, D.
(2003). Determination of the
appropriate event window length in
individual stock event studies.
Available at SSRN 466161
.
Latif, M., Arshad, S., Fatima, M., & Farooq, S.
(2011). Market efficiency, market
anomalies, causes, evidences, and
some behavioral aspects of market
anomalies.
Research Journal of
Finance and Accounting
,
2
(9), 1–13.
MacKinlay, A. C. (1997). Event studies in
economics and finance.
Journal of
Economic Literature
,
35
(1), 13–39.
McWilliams, A., Siegel, D., & Teoh, S. H.
(1999). Issues in the use of the event
study methodology: A critical analysis
of corporate social responsibility
studies.
Organizational Research
Methods
,
2
(4), 340–365.
Sujana, I. N. (2017). Pasar modal yang
efisien.
Ekuitas: Jurnal Pendidikan
Ekonomi
,
5
(2), 33–40.
Ulupinar, B., & Camyar, I. (2020). Election
Uncertainty and Capital Structure.
Economics Bulletin
,
40
(1), 425–436.
Woolridge, J. R., & Snow, C. C. (1990). Stock
market reaction to strategic
investment decisions.
Strategic
Management Journal
,
11
(5), 353–363.
© 2023 by the authors. Submitted
for possible open-access
publication
under the terms and conditions of the Creative
Commons Attribution (CC BY SA) license
(https://creativecommons.org/licenses/by-sa/4.0/).
