Theeffect of the U.S presidential elections on the stock market of their top tradepartners BachelorThesis FinanceUniversity ofAmsterdamFaculty ofEconomics and Business Author: Colin BeekStudent ID: 10563202Supervisor: L. ZouDate: 13th January 2018Statementof OriginalityThis document is written by Colin Beek whodeclares to take full responsibility for the contents of this document. Ideclare that the text and the work presented in this document is original andthat no sources other than those mentioned in the text and its references havebeen used in creating it. The Faculty of Economics and Business is responsiblesolely for the supervision of completion of the work, not for the contents.
Abstract Index Statement of Originality. 2 Abstract. 3 Introduction. 5 Literature review.. 6 Methodology. 7 Introduction The58th quadrennial American presidential election, which was held onNovember 8 2016 was won by the republican Donald John Trump. By beating thedemocratic presidential candidate Hilary Clinton, Donald Trump became the 45thpresident of the United States of America.
The outcome of the 2016 election isviewed as one of the most shocking outcomes in modern political history. SinceDonald Trump, a business man and a reality television star who has nogovernment experience, defeated the former secretary of state. Trump ran acontroversial campaign that focused on immigration control and includedbuilding a wall along the United States border with Mexico and a proposal toban Muslims from entering the United States. He also made comments aboutwithdrawing from several trade and international agreements like the TransPacific Partnership(TPP), NAFTA, the Paris Climate Accord, The U.S.-Cuba dealand NATO. Since being elected Donald Trump has made progress or successfully fulfilledwithdrawment or adjustment of most of these agreements and comments.
Thepresidential election of the United States is a large world event. The electionoutcome could change trading regimes, since the president can alter import tariffsas well as cancel trade agreements without much intervention from the US Congress.The United States of America is one of the biggest countries in the world concerningimport and export, which makes it interesting to conduct a research about the effectof the election outcome on the economy the countries with a strong trade-relationshipwith the United States. Literaturereview Methodology This thesis will be anempirical event study. A way of testing for abnormal returns is given in thearticle by MacKinlay(1997). The abnormal return is the difference between therealized return and the expected return(without the event). To calculate thisabnormal return on a country level we need to calculate the expected returnwithout the event. In this study we will use the world index to acquire theexpected return without the event.
Per country the following regression will beperformed.The MSCI index usedwill depend on the country that is regressed, since there are multiple indexes.For example, a country from Europe will be regressed using a MSCI Europe index,etcetera.To test if an eventaffects the abnormal returns, MacKinley(1997) specifies three periods; theestimation period(T0,T1), event period(T1,T2) and the post-event period(T2,T3). The cumulativeabnormal return is given by: The test is about morethan one country and therefore we use an average of the cumulative abnormalreturns.
By testing this average we can tell if there is a significant effecton all of the trade partners instead of one of the trade partners. The results will betested for significance using their t-values. The study will alsocontain a cross-section analysis. This analysis will research which variablesof the election have a significant influence on the CARs. Control variableswill be collected through the literature review.
The regression model used, isas followed: Export(X): the first variable is export and is an continuous variablethat gives the amount of export of a specific country to the United States ofAmerica in American Dollars($).Democratic(DEMO): A dummy variable which takes on the value of 1 if ademocratic president is chosen and 0 if a republican president is chosen.Re-elected(REELEC): A dummy variable which takes on the value of 1 if apresident’s tenure is extended.DEMO*REELEC: Interaction dummy for the further differential effectof the elected president being both democratic and re-elected.
Margin: Variable which indicates how close the outcome was.Percentage points above 50%.