The Impact of the United State Presidential Election on Jakarta

Islamic Index Stocks: Bid-ask Spread Perspective

Erna Listyaningsih

Economics Faculty, Universitas Malahayati,

Keywords: bid-ask spread, event study, JII

Abstract: The political event which associated with the capital market is one of the interesting phenomena to be

investigated. The aim of this study is to explore the impact of the United State Presidential Election against

the liquidity of Jakarta Islamic Index. Bid-ask spread with Corwin and Shultz formulation was employed as

liquidity proxy. This study conducted an event study and regression methodologies. The results of this study

reported that after the event date experienced a higher bid-ask spread on the first and the second day than

the previous event date. These findings imply that this event has information content.

JEL Classification: G12, G14, G19

1. INTRODUCTION

International events or news have an effect on

countries' internal and external policies and since

this effect is reflected on the market, the decisions of

domestic and foreign investors are revised

continually (Bozkurt and Kaya, 2015). A political

event is one of the events that indirectly affected the

capital market. Political events do not interfere

directly the capital market however these are one of

the information absorbed by investors in the capital

market and use it to obtain expected returns in the

future. Such information influences investor

decision making and ultimately the market reacts to

that information to achieve a new equilibrium

(Haymans, 2006). According to Tzachi Zach (2003)

who investigated return patterns of Tel Aviv Stock

Exchange index and Israeli firms' stocks traded in

the US following announcements of news related to

the peace process found that the pattern was not

present in Israeli stocks that were traded only in the

US. Additionally, the study which investigated

political events on Taiwan’s stock performance

found that price reactions to most of the political

events are rather insignificant, implying those events

be largely uninformative with only a few exceptions

(Chen, Bin, and Chen, 2005). However, according to

Amihud and Wohl (2004) who investigated the

political event effects which are proxy by the

overthrow of Saddam Hussein from the power

against the market stocks found that the connection

between the prices of “Saddam contracts” and stocks

prices, oil prices and exchange rates are pretty

strong. In addition, Bozkurt and Kaya (2015) found

that Iran related internationally significant good

(bad) news had an impact on both Turkey’s political

risk and ISE-100 index in a positive (negative) way.

The US presidential election on 8 November

2016 was responded negatively by the investor. A

market negative reaction can be seen from the

weakening of several indices in the US and the

world after the US presidential election. Tribun-

Bali.com (2016) reported that stock exchange drops

drastically after Donald Trump is appointed as the

US elected president in where the stock market

registered freefall on 9 November 2016 on Wall

Street, the Dow Jones futures market fell 3.2 percent

or 489 points at 17,803.00. S and P futures fell 3.1

percent to 2,070.10. In Asia, Hong Kong's Hang

Seng slumped 2.0 percent to 22,446.77 and South

Korea's Kospi shed 2.3 percent to 1,958.38. The

Shanghai Composite Index fell 0.6 percent to

3,128.37 and sank in Australia's ASX S and P / 200,

1.9 percent to 5,156.60. Additionally, the Composite

Stock Price Index (IHSG) on the Indonesia Stock

Exchange was slipping 1 percent on Wednesday's

trade. Even the fall of the IHSG continued until

Friday on 11 November 2016, when the index closed

252

Listyaningsih, E.

The Impact of the United State Presidential Election on Jakarta Islamic Index Stocks: Bid-ask Spread Perspective.

DOI: 10.5220/0008784502520256

In Proceedings of the 2nd International Research Conference on Economics and Business (IRCEB 2018), pages 252-256

ISBN: 978-989-758-428-2

at 5,289, falling 161 points compared to the previous

day's closing (Kompas.com, 2016).

Donald Trump's controversial policy which he

repeatedly stated when campaigning was to prohibit

Muslims from entering the US. His statement is also

listed on Trump's official campaign website (Liputan

6, 2016). Regarding his policy plan, it will be

influenced on the capital market. And no exception

for Indonesia which the society is the largest Muslim

in the world, there are Islamic indices in Indonesia

capital market, such as Jakarta Islamic Index (JII)

and Index Saham Syariah Indonesia (ISSI).

The political events could be a positive or

negative effect towards capital market. Due to

decreasing the IHSG after Donald Trump won, it can

be said that this event was responded negatively by

investors at Indonesia capital market.

The objective of this study is to explore the

reaction of bid-ask spread as liquidity proxy of JII

stock against the political event, namely the US

presidential election. This study is interesting

because this study employed bid-ask spread for

liquidity proxy by using the formulation of Corwin

and Schults (2012) which quantify bid-ask spread

from the daily high and low prices of stocks in

which no prior work conducted on this issue. In

addition, the results of the previous studies regarding

this issue is varied, therefore this research

conducted.

The next section presents the methodology.

Literature reviews regarding the political event, and

Sharia investment and liquidity in Section 3. The

Empirical Results in Section 4, and the Discussion

and Conclusion are in Section 5 and Section 6

respectively.

2. METHODOLOGY

This research employed an event study and

regression methodologies. November 8

2016 was



Jakarta Islamic Index (JII) is sharia compliant index

which has thirty sharia stocks. It’s based on Islamic

principles such as company does not conduct activities:

gambling, interest rate based on banking, speculation etc.

They also have less debt and high market capitalization

and high liquidity. JII stocks will be evaluated every six

months which one meets the requirement. The JII

screening could be seen in http://www.idx.co.id/en-us/idx-

islamic/islamic-product/ and http://www.idx.co.id/en-

us/idx-islamic/islamic-stock-index/ )

selected as an event date due to that day was the US

presidential election. For regression, this study used

regression of bid-ask spread.

The data of this study employed JII stocks

sample which consists of 30 stocks for a period of

June – November 2016. The data used is the daily

high and low prices of JII stocks during the US

presidential election in 2016. All data retrieved from

the Indonesia Stock Exchange.

Additionally, liquidity proxy employed the

Corwin and Schultz formulation with the high–low

spread estimate (Corwin and Schultz, 2012) to

quantify the liquidity surrounding the US

presidential election by using daily high and low

prices of stocks for the bid-ask spread. The prior

study which used the formulation was conducted by

Listyaningsih and Krishnamurti (2016). Equation (1)

presents its formulation

2 (e

– 1)

S= (──────)

...................................................... (1)

1+e

where S is bid-ask spread and e is exponential.













322 322

[ln( )]













which is the sum of expected

squared ratio of high

and low prices ratio for two consecutive days.

Gamma (γ) equals

[ln( )]



a squared ratio of

high and low prices over a range of two days

(

Listyaningsih and Krishnamurti, 2016).

This study employed t-test by using 21 event

window (Krishnamurti, Sawicki and Zhongqi,

2006). The regression of the market model is

presented in equation 2.

= β

+ β

+ e

.................................... (2)

In where S

indicates Spread on stock i for

period t, S

indicates market spread on IHSG for

period t as a proxy of market spread and β

and β

are

the regression coefficient of S

and e

is the error

term.

3 LITERATURE REVIEW

3.1 Political Event

The capital market could be affected by political

events such as elections, reshuffle cabinet, political

The Impact of the United State Presidential Election on Jakarta Islamic Index Stocks: Bid-ask Spread Perspective

253

instability, and some event-derived factors external

economy. There was GDP growth is associated with

the prediction of Wall Street, as defined by the

change in stock price immediately after the

presidential election. This relationship has

strengthened over time (Chien, Mayer, and Wang,

2012). However, according to Sudewa and Sari

(2015) who investigated the reaction of LQ 45

stocks against Indonesia presidential election in

2014 found that the results obtained indicate that

there is no market reaction during the 2014

presidential election and there is no difference in the

average abnormal return between before and after

the 2014 presidential election. Likewise the study

which conducted by Yuniarthi and Sujana (2016) in

which the result is the same due to the market

reaction will tend to wait and see the certainty of the

leader which is selected later.

The other study conducted by Sihotang and

Mekel (2014) who investigated the company of

construction, infrastructure and utilities listed on the

Indonesia Stock Exchange towards Indonesia

presidential election in 2014 found that there were

no significant differences between abnormal returns

before and after the presidential election, however

there was a significant difference between trading

volume activity before and after the Presidential

Election. Additionally, there was an increase in the

average volume of stock trading at before and after

the presidential elections in 2014 on LQ 45 index

(Diniar and Kiryanto, 2015). The result of the other

study found that market overreaction was only found

in winner stocks in the period after the US

presidential election. This research did not find the

price reversal on the winner and loser stock due to

only one stock sample that experienced market

overreaction marked by increasing CAR rank in the

extreme, while other stocks did not show it (Sabina,

and Sulasmiyati , 2017). In sum, the results of this

issue are varied therefore this research is

interestingly conducted.

3.2 Sharia Investment and Liquidity

Islamic framework of the stock market is no

predetermined interest rate, excess speculative

activities and asymmetric information (Kia, 2015).

Islamic investment differs from conventional

investing in different ways such as the prohibition of

gambling, pork, alcohol, entertainment, tobacco,

profiting from interest rates etc (Kumar and Sahu,

2017). The screening process applied to Islamic

investment (Peillex and Rangau, 2015). Therefore, it

can be said that this investment is based on faith.

This study investigated whether the US

presidential election has information content, if there

is information content therefore, it is expected that

the market will react towards this issue. The reaction

regarding this issue can be seen from the liquidity, in

this term I used the bid-ask spread as liquidity

proxy. An interesting aspect of this study is that no

previous work which conducted in the bid-ask

spread with Corwin and Schultz's formulation

regarding this issue.

Based on theoretical background in which the

event of the US presidential election was responded

negatively by investors, and also due to the

characteristics of JII stocks which is including blue

chips stocks and sharia-compliant stocks, therefore, I

expect that JII stocks experience an increase in bid-

ask spread. Therefore, this study posits the following

hypothesis:

H1: JII stocks experience an increase in bid-ask

spread after the United State Presidential election.

4. EMPIRICAL RESULTS

4.1 Paired Sample t-test

Table 1 shows that on the first day and the second

day after the event date, the bid-ask spread is

significantly higher than the previous event date.

However, on the third day and the fourth day after

the event date, the bid-ask spread is significantly

lower than the previous event date. From the fifth

day up to a ninth day after the event date, the bid-ask

spread increases significantly. The results support

the hypothesis in which after the event date there

was an increase in bid-ask spread

Table 1: Paired sample t-test of the daily bid-ask spread

ays

Average of bid-ask

spread

p-value Before After t-statistics

1 0.03446 0.04716 -5.578 0.000

2 0.04044 0.05787 -4.510 0.000

3 0.03944 0.01113 5.177 0.000

4 0.03751 0.00697 4.917

0.000

5 0.03242 0.05594 -6.167 0.000

6 0.03156 0.04646 -4.018 0.000

7 0.02599 0.03572 -4.517 0.000

8 0.02595

0.03204 -3.035 0.005

IRCEB 2018 - 2nd INTERNATIONAL RESEARCH CONFERENCE ON ECONOMICS AND BUSINESS 2018

254

9 0.02507 0.03277 -2.613 0.014

10 0.02224 0.00534 3.704 0.001

** and *** denote significance at 0.05 and 0.01 levels

respectively

4.2 Regression Results

Table 2 reports that the results of a regression of

daily bid-ask spread having the adjusted R square

value is 73.6%. Additionally, the market bid-ask

spread coefficient is significantly positive at 1%

level. It suggests that market bid-ask spread affects

the JII bid-ask spread. It means that the event of the

US presidential election has influence JII stocks

liquidity. Additionally, the regression result supports

the paired sample t-test in which there is a

significant difference in bid-ask spread before and

after the event date.

Table 2: The Results of Regression

The daily bid-ask spread regression on JII stocks: 25

October – 22 November 2016.

= αi + β

+ e

Variables

β t p-value Adj R

Constant

(αi)

0.026

14.856

***

0.000

Eq. 1

Market bid-

ask spread

(

β1

)

0.825

7.542

0.000 0.736

*** denotes significance at 0.01 level

5. DISCUSSION

This study found that there was an increase in the

bid-ask spread of JII after the event date on the first

and the second day due to negative response of

investors to this event. So that when the event

comes, the JII led higher bid-ask spread. However,

an increase in bid-ask spread was not in a long term.

Nevertheless, it can be said that this event has

information content.

6. CONCLUSION

The result of this study found that there was an

impact of the US presidential election on the bid-ask

spread of JII stocks. The bid-ask spread runs into an

increase after the event date. This result suggests

that the event has information content.

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