國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
2. France-Taiwan: Backgrounds. Specific Focus on Political Rights, General History, Political System and the Stock Exchange in the Two Countries
The main goal of this study is to determine with two different analysis how the presidential elections affect (or not) the stock market and its indices for both France and Taiwan, the countries selected to conduct this research. Before entering into the empirical studies and the analysis to answer our specific question, we need to understand the political background and the current political situation in these two countries. We will also focus on the development of stock exchanges and the main indices for France and Taiwan to determine which ones will be used as references in our research. This will allow us to have a complete understanding of the global situation and will help us to determine the data we will use to conduct our research.
France-Taiwan: Politics and rights
Information regarding politics, freedom and individual rights for each of the two countries will be extracted from independent and neutral sources. It will guarantee the accuracy and objective point-of-view on the situation in France and Taiwan. The organization Freedom House is one of them, as it can be described as “an independent watchdog organization dedicated to the expansion of freedom around the world. Freedom House acts as a catalyst for freedom through a combination of analysis, advocacy and action. Our (Freedom House organization) research and analysis frames the policy debate […] abroad on the progress and decline of freedom.”
Hence, it is possible to use the different analysis from this organization to explain, with as much objectivity as possible, the political situation in these two countries.
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
First of all, we will focus on the 2014 Freedom in the world map realized by the organization.
The rating proposed in the analysis has been established on a 1 to 7 scale, 1 being the highest possible grade and 7 the worst. To determine the freedom rate for every country in the world, the organization takes into account different factors that can be divided in two main sections:
- Political rights. It includes the electoral process, political pluralism and how the government works (if this one can be reliable and trustful based on its transparency).
- Civil liberties. Freedom of expression, individual rights, the rule of law and the associational and organizational rights are analyzed to determine the grade of this section.
The general methodology of the research conducted by the organization is derived from the Universal declaration of human rights. The freedom of press, which is also an important element to take into account, is not part of the general rating but the base of an independent study. Both countries are given the status of having “Free press”. This result is particularly outstanding as only 14.5% of the world’s citizens live in countries that “enjoy a free press”, according to the organization. The freedom of press is a factor that helps reflecting the degree of democracy of a country as a government taking control of media is often an indicator of democratic institutions future assault. The good rating of France and Taiwan regarding this factor translates well that they are both ruled under democratic regimes.
Regarding the general rating, France is rated as a free country and this, with the highest grade of 1.0. In fact, both the political rights and the civil liberties ratings reached the highest mark on their grading scale. On the other side, Taiwan also has the status of “free country”. The freedom rating grade given by the organization is 1.5. This is 0.5 points lower than the French grade. The
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
explanation can be found in the civil liberties rating which did not reach the highest grade with 2 points. Nevertheless Taiwan is, according to Freedom House, with Japan the freest country in Asia and the political rights in Taiwan are given the highest grade of 1.0 by the organization.
These results are important in the conduct of our research as the two countries of our study have the status of free country. The freedom factor, as a consequence, won’t affect our analysis and bring bias in our study. Otherwise, we would have had to incorporate this element in our comparison and make a clear distinction between a “free” country and a “less-free” country.
How Taiwan has become what it is nowadays?
This is in 1949 that the island of Taiwan has become the place of retreat for the Kuomintang (KMT) “Republic of China” after the defeat in the civil war against the Communism of Mao Zedong. Chang Kai-Chek was, at the time, the leader of the political party and remained the president of the Republic of China (R.O.C) until his death in 1975. He claimed the existence of a unique China (the R.O.C) and withdrew from the United Nation Security Council after the admission of the PRC (People Republic of China) in 1971. Under its politic, Taiwan was ruled under a unique party and a martial law system, finally abolished in 1987 by his son. Chang Kai-Chek highly contributed to the economic development of the island, increasing substantially exportations. After the death of Chiang Ching-Kuo in 1988, son of Chiang Kai-Shek who allowed more Taiwanese to take up political decision, Lee Teng-Hui became the first Taiwanese born ROC president. This president will bring some major change in the Taiwanese political system. In fact, he will be at the origin of the first open elections in Taiwan, in 1996 and also the first legislative elections in 2001. The relationship with China has remained really complicated during the presidency of Lee. First, working in for the “one China
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
policy”, he developed throughout times a more pro-independence politic. It led China (PRC) to launch a series of missiles close to the coast of Taiwan in 1995. Being re-elected in 1996, he didn’t accept the proposition made by China offering to lift the ban on direct flights and shipping between the two territories. The year 2000 had brought a major change in the political landscape of Taiwan. In fact, for the first time since the retreat from China, the KMT was no longer the political party in power. The newly elected president, Chen Shui-Bian, is from the DPP (Democratic Progressive Party) political party, main political opposition of KMT in Taiwan. This is after his re-election in 2004 that the cross-strait relationship between R.O.C and PRC worsen and reached a peak in tension, with the announcement of an “anti-secession law”, in 2005. This law granted mainland China the right to use force and attack Taiwan, should the island declare its own independence. With the election of the current Taiwanese president, Ma Ying-Jeou, in power since 2008, the tensions between the two governments has decreased and the relationship considerably improved. President Ma defined a new policy called the “three noes”: No unification, no independence and no use of force. The concrete facts regarding this relationship improvement were the signature of an economic cooperative agreement in 2010 and an historical meeting between two representatives in 2014, in the Chinese city of Nankin, the first official one since 1949.
The political system in Taiwan can be defined as a semi-presidential system. Taiwan is
“multiparty democratic regime” that combines elements of both parliamentary and presidential democracy. The president of Taiwan is elected for a maximum of two four-year terms. He is the head of the state but also the one who holds executive power. He is responsible to nominate the prime minister (the premier) who is the head of the government and president of the executive Yuan (“house” in Mandarin). The legislative power (law-making) is hold by both the
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
government and the parliament. In Taiwan the judiciary is independent from the executive and legislative power. The three main parties in Taiwan are the following: the Kuomintang, the Democratic Progressive Party (Minjindang) and the People first party (Qinmindang).
We will consider 5 presidential elections in our study as 5 elections have been hold in Taiwan since 1996 (1996, 2000, 2004, 2008 and 2012).
How France has become what it is nowadays?
Since the French revolution of 1789 and the declaration of the rights of man and of the citizen, France has known 15 different constitutions with their own specificities and three kind of regime: empire, constitutional monarchy and parliamentary republic. This is in 1848 that France experienced its first direct election. The country will have to wait more than 200 years to have this experience again. After two different empires during the nineteenth century, ended in 1870, the republic has become the only regime in France with the laws designed by Jules Ferry.
The country has been involved in the World War I from 1914 to 1918 and the World War II from 1939 to 1945 and has considerably suffered, as all the countries involved, from these two events.
The recovery, during the next thirty years, named by the French economist Jean Fourastié “les trentes glorieuses” (The glorious thirty in English), marked a period of fast growing economy (high GDP and employment rate) and demography in France. This is in 1958 that France has become, under the impulsion of General de Gaulle, a parliamentary constitutional republic with a presidential regime, also called semi-presidential system. The direct election process was finally re-established in 1965 and continues operating at the time this thesis is written. From an historical point-of view, France has been run mostly by right-wing parties. The first time a
“socialist” (left-wing side) president was elected was in 1981 with François Mitterrand. He stayed a total of 14 years at the head of the French government as he was re-elected in 1988.
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
This is then Jacques Chirac by two times and Nicolas Sarkozy who occupied this function. The last election of 2012 promoted François Holland, the second socialist president of the French history.
So as Taiwan, the French political system is a semi-presidential system. The government of the French Republic is determined by the French constitution of the fifth republic (Every time the French government changes the constitution, a new republic is created). The president is the head of the state. He shares the executive power with its prime minister who can be revoked by the National Assembly (lower house of the parliament). The other part of the parliament is called the Senate (“Sénat” in French). Together, the National Assembly and the Senate form the Legislative branch of the French government. The judiciary part is also independent.
For our analysis, we want to consider the elections that happened in France since 1965. The reason for this choice is that the specific election that occurred that year was the first direct one and this, since the second republic in 1848. Nevertheless, as we will see in the next part dedicated to the study of stock exchange and stock market indices for France and Taiwan, the CAC 40, main index in France, was only implemented in 1987. This date will be then the starting point of our study and will take into account the following presidential elections in France for our study: 1988, 1995, 2002, 2007 and 2012. The presidential term used to be 7 years until it was decreased to 5 years, in 2000. This will be an important factor to take into account in the economic cycle analysis for France (Nevertheless, it won’t affect our abnormal return study).
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
The stock exchange in Taiwan
The information directly linked to the history of stock exchanges and main indices for both France and Taiwan will mainly be extracted and analyzed from the respective stock exchange website of these countries that are believed to be the most transparent and accurate source of information regarding this specific topic.
The Taiwan Stock Exchange TSEC has been founded in 1961 and officially began to operate on 9th February 1962. After its first year of existence, the stock exchange only had 18 listed companies. Since that time, the number of listed companies has grown substantially to reach the number of 809, the 31st December 2013 with a total market capitalization of NTD 24,291,518 million or, in other words, USD 813 billion (calculations realized with the USD/NTD exchange rate on the 31st of December 2013).
Foreign investors have historically faced several limitations to invest set by the Taiwan Stock Exchange. These restrictions are common on emerging stock market and are implemented with the main purpose to increase the probability of local investors’ success, reducing volatility and speculation. Nevertheless, in 1991, the TSEC allowed Qualified Foreign Institutional Investor (QFII) to realize investments in the Taiwanese stock market. The logical following step was to give this right to individuals (natural person). It happened in 1996 with the creation of investment quotas. Nowadays, there are no limitations on offshore investments and quotas only apply for onshore investments. Inwards and outwards payments are limited to $50 million per year for Foreign Institutional Investor and $5 million for Overseas Chinese and Foreign Individual Investors. Nevertheless, except for some specific companies, limitations on the ratio of shareholding have been cancelled. According to the statistics conducted by the Taiwan Stock
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
Exchange, 33,5% of the shares were hold by foreign investors, by the end of September 2012.
It seems that the domestic investors are mostly individual (rather than institutional) at the proportion of 80.2% whereas 99.5% of the foreign investments come from institutions (end of 2012). Finally, it is possible to say that the Taiwan Stock Exchange receives most of its investments form individuals (62.5%). This characteristic shows for example the difference between this stock exchange and the more mature US stock market, led by institutional investors.
The Taiwan Stock Exchange Capitalization Weighted Stock Index is the main stock index in Taiwan. It has been released in 1967 by the Taiwan Stock Exchange using 1966 as the year of reference, with a base of one hundred. This index is the most important in Taiwan as it is weighted by all the listed stocks at the TSEC. This is the reason why we can say that the TAIEX is a good indicator of the general economic condition of the island.
With the purpose of further development, the Taiwan Stock Exchange Corporation found an agreement with the global index provider FTSE through a joint-venture. It allowed them to create the FTSE TWSE Taiwan Index Series, a second index series composed by 7 different indices to bring more differentiation in the local stock exchange. The main new feature is the division of companies’ market capitalization in two different indices:
- The FTSE TWSE Taiwan 50 index, listing the 50 first biggest market capitalization stocks on the Taiwan Stock Exchange. The stocks represent in total 70% of the Taiwanese market. It was launched in 2002 with an index base value of 5,000.
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
- The FTSE TWSE Mid-Cap 100 index, as its name suggests, includes the 100 next market capitalizations which can be described as “Mid-Cap”. The stocks represent 20%
of the Taiwanese market. This index was launched in 2004 with an index base value of 5,000.
Graph 1: TAIEX Weekly Performance from 1994 to 2013
The stock exchange in France
The first Stock Exchange appeared in France in 1540 in the city of Lyon. At that time, companies’ stocks were not listed nor traded. The Stock Exchange was considered as a place for merchants to negotiate goods and bills of exchange, which were the contracts used by people for business. This is finally in 1724 that the Paris Stock Exchange was created under the name
‘Bourse de Paris’. It moved in Palais Brogniart in 1826, built under the emperor Napoleon Bonaparte, where it stayed during more than 150 years. In the early 19th century, only 7 stocks were traded. At the end of the century, it was around 800 stocks that were listed and could be traded on the Stock Exchange. The place was first forbidden to women, who finally gained the right to enter the Stock Exchange and realize trades in 1967. The stock exchange will continue
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
its modernization and development, especially with a strong computerization during the 1990’s and the creation of the CAC (Continuous Assisted Quotation) system in 1986. The year 2000 has been critical in change for the Paris Stock Exchange. In fact, the Stock Exchange of Paris, Amsterdam and Brussels merged to a unique entity named Euronext. The Stock Exchange of Lisbon and Porto (Portugal) integrated the group after having been bought in 2002. The same year, the London International Financial Future and Options Exchange (LIFFE) followed the same way. These consecutives mergers reached a new peak in 2007 with the creation of NYSE Euronext, which is the result of the merger between the New-York Stock Exchange and Euronext. The newly formed group is, since its creation, the worldwide 1st group of Stock Exchanges (the capitalization of the entity reached US$ 14,085.9 billion in 2012).
The main French stock market index is named CAC 40. This index tracks the forty largest French stocks, based on their market capitalization. Like the TAIEX in Taiwan, the CAC 40 is a capitalization-weighted index. This index is a benchmark for the French stock market and can be compared with the Dow Jones in the United States in the sense that it shows well the trend, overall level and direction of the market. The CAC 40 was set the 31st December 1987 and had the base value of 1000. It ended the year 2013 with a value of 4295.5 points.
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
Graph 2: CAC 40 Index Weekly Performance from 1988 to 2013
Different other indices exist to track stocks with lower market capitalization. The CAC mid 60 is an index that includes 60 stocks with middle capitalization (mid-caps). From 2005 to 2011 this index was called the “CAC mid-100” and included at the time 100 stocks of this type.
NYSE Euronext Paris decided to re-organize its indices in 2011 in order to add more dynamism in the stock exchange, trying to increase the investment in companies with smaller market capitalization (small and mid-caps). Another index, the CAC Small, former CAC Small 90, regroups the small capitalization of the stock exchange. It used to track 90 stocks but the index is, since the 2011 reform, allowed to track an unlimited number of small capitalization stocks.
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
3. Literature Review
3.1. Business and Market Cycles
Business cycles: Definition
The answer to our research question will be determined through two different studies that will lead us to a general conclusion. The first study will be conducted with the purpose to identify market cycles around presidential elections for the selected indices of France and Taiwan.
Before going through the past studies and findings in the next part of this literature review, we need to understand the general concept of market cycles. To see how cycles occur on financial markets, we need first to remind a really well-known economic theory that has been discussed for many years: Business cycles. This first step is mandatory as business and market cycles are really closely linked. The purpose of this first part of literature review is then to understand what business cycles are, how to identify them and what the main explanatory theories are.
Once this will be done, it will be possible to find out the nature of the relationship between
Once this will be done, it will be possible to find out the nature of the relationship between