Market movements during multiphase democratic elections: Evidence from India 2019

Abstract

The impact of elections on an emerging market affords opportunity for investors to leverage ultra-short-term uncertainty to generate returns. To understand the uncertainty in the market, we conducted an analysis on the different phases of the Indian election, 2019. By taking a multicap mutual fund, we were able to create a representative set of 53 stocks which then were reclassified in two ways – by sector and by market capitalisation – to conduct analysis on the bid-ask spread and its relationship with elections. We found that sectors which are dominant in certain states displayed high uncertainty during elections, and the states where this impact was seen most were those which went to election in one phase, as opposed to multiple phases. We also saw that this uncertainty declined over time, likely as more information penetrated the market, reducing the magnitude of bid-ask spread change closer to May 23, 2019, when results were declared