The Impact of Major Political Events on the Behavior of CSE Stock Returns

Abstract

Abstract The purpose of this study is to examine the market reaction to political events in Colombo Stock Exchange (CSE) using seven major political events which represent five industry group sectors during President Gotabaya Rajapaksha’s House-Bearing Period. Using event study methodology and univariate time series models author determined how uncertain political events are affecting CSE. When considering the seven political events in the study, could be seen that there are significant abnormal returns pre-event for all events. While only the event of Ranil Wickramasingha being appointed Prime Minister did not show significant abnormal returns in the post-event period, all other events show abnormal returns in the post-event period as well. All sectors had significant abnormal returns in the pre-event period. In the post-event period, the Food Beverage & Tobacco sector (FBT) and Capital Goods (CG) sector did not show abnormal returns for events five and six. Therefore, CSE is not semi-strong form efficient during these events’ periods. Moreover, the change in the signs of the abnormal return (positive/negative) suggested that the political environment in Sri Lanka was still unstable.