Output, stock returns and political uncertainty the Nepali evidence

Abstract

This study examines the effects of political uncertainty on stock returns in the Nepali stock market over a period 1994 to 2010. The secondary data (NEPSE index and stock indices of ten industries registered in stock market of Nepal) as well as responses of 116 individual investors and 42 officials of listed companies, have been used to analyze the effects by using descriptive, causal-comparative, and co- relational research designs. Results suggest that there is a strong relation between the political uncertainty and stock returns in the Nepali stock market and that ruling political parties have effects on stock returns. The Nepali Congress Party government under the prime minister-ship of Mr. Girija Prasad Koirala remained favorable to stock returns, whereas, at the times of other governments the effects were not significant. The national elections affected stock returns, but there were no clear patterns of movement of stock returns before and after the elections. It is concluded that stock returns are affected by important political events with the impact of varying degree at across to different industry groups. It is found that negative volatility matters, specifically output decreases with increase in negative stock market volatility. One unit decrease in negative volatility was matched with the 1.8% decrease in industrial productivity. Hence it can be concluded that volatility and industrial production has relation in Nepalese stock market. As political uncertainty is not good for stock returns, political parties need to work to avoid such uncertainty and try to form stable governments. Investors need to carry thorough analysis of the effect of the event on specific industries or firms as they plan to invest in stocks.