Wasif AliMichael BecharaPriya ChandrashekarZhanpeng RuanSTAT 3250 Group #2

The Effect of Domestic and Foreign Political Events on U.S and London Stock Markets

Executive Summary

The main objective of this project was to investigate the belief that significant national

and international events have a significant impact upon national or international stock markets.

In the wake of the 2016 presidential election and the subsequent publicly broadcasted fear of

significant market turmoil, three domestic and three international events, which were claimed to

have significant impact fiscally, were chosen for analysis.

Three of the most recent US presidential elections (except 2016, where only primaries

had enough time passed for data collection), along with the Greek financial crisis, Scotland’s

independence referendum of 2014, and 2016’s United Kingdom European Union membership

referendum (Brexit), along with corresponding stock market data from one month prior and one

month after each event were tested to see if there was any significant change. 60 sets of stock

data were obtained from NASDAQ and the London Stock Exchange Group (LSEG), along with

currency and inflation rates for proper adjustment of prices. Scatter plots, confidence intervals,

and matched-pairs t-tests were used as analysis techniques for each event and their claimed effect

on both the US market and the UK market to observe the magnitude of difference each event

caused on the markets.

All tests of analysis resulted in strong evidence that none of these events had any

significant effect on the stock markets, international or domestic. Further analysis could target if

a smaller window of time yields more evidence of volatility in the market caused by these

events. Based on the analysis results, investors should not make rash decisions in their dumping

of stocks during a politically tumultuous time, and the prospect of shorting stocks is only viable

within a very short window for events such as these, as timing is critical before the market

returns to equilibrium.

Summary of Data and Analysis

Stock data was obtained from the NASDAQ official website and Yahoo Finance. 30 of

the top stocks were taken from each of the NASDAQ and LSEG stock exchanges for a total of

60 stocks and their fields. Each of the stocks’ data fields were trimmed down to the seven criteria

of interest: date, close price, volume, open price, highest price and lowest price. The daily data

for the past 10 years were gathered for each of the 60 stocks and their seven criteria of interest.

Data concatenation was done by use of the glob module to search through files in a loop

and identify applicable csv’s. Once the csv was identified in the necessary working directory

(individual NASDAQ and LSEG folders), the filename was searched through as a string to get

the stock name and add that to a new column in the data frame. Following the completion of the

data frame, it was converted into a new csv of clean working data for use in the analyses.

In order to reflect the real hypothesized impact of the political events on both markets of

study, inflation and currency exchange rates posed to be significant aspects that could affect the

data if left unadjusted. Monthly U.S. consumer price indexes (CPI’s) were extracted from the

Federal Reserve Bank while U.K. monthly CPI’s were taken from the U.K. government website,

allowing generation a CPI trend since 1987.

As shown in the graphs above, since the CPI has had significant increases in both

countries, we believe that it was necessary to incorporate the effect of inflation into the data

analysis. Each CPI was selected for its corresponding timeframe of the events studied, and in

turn an inflation rate was computed for that period. The inflation rate was then applied to all pre-

event prices so that they became adjusted for comparison to the post-event prices.

For a fair comparison to be drawn between both the NASDAQ and LSEG markets, it was

necessary to apply currency conversions to the LSEG market stocks’ data. Because currency

exchange rates fluctuate constantly, adjusting the stocks based on exchange rates were critical.

Daily currency exchange rates were applied for converting LSEG stocks to USD equivalents

using daily currency exchange rate data pulled from the Federal Reserve. There were some

missing values in the exchange rate data set, which were replaced by extrapolating the missing

rates using the previous exchange rates since changes within one day would be minor, with the

previous day’s rate being a close approximation.

The corresponding exchange rate for each event’s timeframe was extracted and applied

(using the stock price in GBP multiplied by the conversion rate) to create USD stock prices

adjusted for both inflation and daily currency exchange rates.

To determine if each event had an effect on domestic and/or international stock markets,

a matched-pairs hypothesis test was conducted on stock prices one month prior to each event and

one month after each event. After applying inflation and currency exchange rate adjustments to

the data, pre-event and post-event average stock prices were calculated for every stock. Each

stock’s difference was calculated, and using those 30 values of price difference, a confidence

interval was constructed in addition to running a t-test on the sample of stock price differences.

For each of the six events, testing was done on both the domestic and foreign market

stocks, resulting in 12 different hypothesis tests, with the null hypothesis being that the event in

question had no effect on the stock price, while the alternative hypothesis was that there was an

effect on stock price due to the event. Details of hypothesis testing results and relevant

confidence intervals are below:

Each of the 12 hypothesis tests yielded p-values well above the 5% or even 10%

significance level, showing no evidence to suggest rejecting the null hypothesis that the events

caused no effect on the NASDAQ or LSEG markets. No event showed any significant long-term

effect on either its respective domestic or international market. Confidence interval widths on

observation are clearly wider for stocks in the LSEG and the events’ corresponding timeline for

analysis, which could suggest more volatility in the U.K. stock market, especially when

compared to the U.S. markets. Based on confidence interval width, there is some evidence to

suggest that the largest impact from a foreign event on the NASDAQ was the Scottish

Independence referendum, while the largest impact from a domestic event on the NASDAQ was

the 2016 Super Tuesday. Brexit, unsurprisingly, had the largest confidence interval width of any

event in regards to its effect on the LSEG stocks, while the Scottish Independence referendum

yielded the lowest p-value.

Scatter plots of stock price difference were also created to demonstrate if there is any

significant outcome. Details of scatter plots are shown below:

2008 Presidential Election:

2012 Presidential Election:

2016 Super Tuesday:

Brexit:

Greek Bailout:

Scottish Independence:

Each of the scatter plots shows the 30 stocks of the respective market and their associated

difference one month before and one month after the event. With few exceptions, the majority of

the points in each plot are distinctly distributed around zero, meaning little-to-no average

difference in stock price due to event.

In addition to stock prices, we also took a look at the volume changes before and after

each of these events. As demonstrated in the bar graphs below, volume does not seem to change

significantly during the timeline of the event, meaning overall political events do not lead to

changes in investing behavior, which could potentially explain the insignificant impact of

political events on stock prices.

2008 Presidential Election:

2012 Presidential Election:

2016 Super Tuesday:

Brexit:

Greek Bailout:

Scottish Independence:

Conclusions

Based on the results of the hypothesis tests and confidence intervals, there is significant

evidence that major political events have no long-term effect on either domestic or foreign

markets. Contrary to the publicized panic around each event’s looming effect on the global

marketplace, within one month the highest volume stocks of major markets will return to

equilibrium in trading price. The typical unloading of large amounts of stocks in the wake of

events such as these is in fact a notably terrible long-term decision. In addition, individuals who

attempt to short stocks around the timeline of these events should err on the side of caution due

to the short window of time where their stock market is affected by the event.

Further Steps

As said earlier, there is a short window of time for which to short stocks efficiently in the

wake of a major political or world event. Since the 60-pday timeframe for each event proved to

show no long-term effects on the stocks, more testing could be done to see at what point the

volatility in the market remains statistically significant. Based on those tests, more accurate

windows of time for shorting or buying stocks on weakness could be determined. In addition,

expanding the sample size to more stocks from each market would help strengthen the samples.

Testing other global markets to see if their stocks are as resistant to long-term change would also

help further cement the conclusions found in this analysis. Lastly, since LSEG was most affected

by the 2016 Super Tuesday, testing the 2016 Presidential Election’s effect on the markets would

be interesting for confirming results.