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The Impact of Coup d'états on the Relationship between Stock Market and Exchange Rate: Evidence from Thailand

This study investigates a dynamic relationship between the Stock Exchange of Thailand (SET) index and the exchange rate of Thai Baht and US dollar (THB/USD) by using daily data for the period of Coup d'état in Thailand during 2006 to 2016. In the long run test, the Johansen's cointegration analysis shows significant long-run relationship during the pre-Coup d'état 2006 and the pre-Coup d'état 2014, but the Coup d'état 2006 and the Coup d'état 2014 are vice versa. The Granger causality tests in all periods show uni-directional causality except the Coup d'état 2006. In the short run test, the SET index shocks in all periods negatively affect the exchange rate of THB/USD except the Coup d'état 2014. In summary, the Coup d'états influence on the compose of the SET index and the exchange rate of THB/USD in both long-run and short-run relationship based on the evidence from Thailand. rate of THB/USD responses a negative shock to the SET index. On the other side, the SET index responses a significant low negative shock to the exchange rate of THB/USD. The relationships in all periods remain stable at zero after five days. In the short run, however, the shock from the exchange rate of THB/USD to the SET index shows a positive association only during Coup d'état 2014. For the response to itself, both the exchange rate of THB/USD and the SET index show a significant positive shock then a quick react to zero. Consequently, all the impulse-response functions test show not persistent in more extended periods.


Introduction
In the last century, there were nineteenth of successful Coup d'état or attempted Coup d'état in Thailand. The occurrences lead Thailand to the first ranking in Southeast Asia and the fourthranking in the world by the Center for Systemic Peace (Monty and Donna, 2018). This high frequency of adverse events persuades us to examine whether political instability influences a relationship between the financial market and the exchange rate in Thailand.
According to Bunce (1980), the Coup d'état affects the change of political regime, for instance, policies, political style, government performance, and responsiveness. As a following, Dunning (2005a) proposed that the change of political regime influence the financial market. These motivate us to the question that Does Coup d'état affect the financial market and economic stability in Thailand? To answer this question, we select the cointegration test as a tool to find a relationship between the SET index and the exchange rate of THB/USD. This study investigates the long-run relationship, causal relationship, and short-run relationship. The results might be helpful for the practitioners, and asset allocation investors to assess the Coup d'état situation through their financial market and economic stability.
The remainder of this article is organized as follows. Section 2 describes the literature review. Section 3 analyzes the data for model specifications. Section 4 provides the methodology and also the empirical results and their interpretations. Lastly, Section 5 includes implications and conclusion.

Literature Review
Recently, the relationship between exchange rate and stock price is investigated in finance and economic literature. The implication of strong relationship provides essential information for practitioners, investors, and policymakers. In a theoretical study, the foreign currency and stock market are suggested by a flow-oriented model and a stock-oriented model.
First, a flow-oriented model introduced by Dornbusch and Fischer (1980), explains that the changes in the exchange rate have a direct effect on the firm's value and stock price as a sequence. In the analysis of cointegration test that proposed by Kim (2003); Pan et al. (2007); Wongbangpo and Sharma (2002); Wu (2000), the long-run relationship shows that the exchange rate influences the stock market. Second, Branson (1981) and Frankel (1984) suggested a stockoriented model that the change in the stock price effects to the change in the exchange rate. Following, Ibrahim and Aziz (2003) and Maysami and Koh (2000) implemented the cointegration test, and the results explained that the exchange rate is influencing the stock market in the long-run relationship.
In the economic context, the relationship between exchange rates and stock prices are specifically investigated on the events during financial crisis periods. Because, there are stronger effects on both currency and stock markets as documented by Lin (2012); Sui and Sun (2016). During the global financial crisis period from 2008 to 2012, Tsagkanos and Siriopoulos (2013) found a causal relationship between the stock price and the exchange rate of the short-run in US market and the long-run in the European market. In the period of the Asian financial crisis, similarly, Pan et al. (2007) found a causal relationship between the exchange rates and stock markets among the seven Asian countries. In the same way, Fang (2002) found that the exchange rate depreciation effects on the change in the stock market volatility. On the further event, Granger et al. (2000) proposed the evidence from the Asian flu of 1997 to 1998 event. By testing on the stock prices and the exchange rates through nine Asian markets, and the results show significant relationships.
Analogously, in the political economy context, the change of political regime also influences on the financial market as found from Dunning (2005b). The resource-dependent states, the political and economic contexts are potentially related. Similarly, Civilize et al., (2015a) examined the civilian and military governments affect the performance of the stock market. The stock market performance on the civilian government will be better than the military government on the selected countries except for Thailand and Pakistan. Notably, in Thailand, Prasirtsuk (2007) argued that the Asian financial crisis of 1997 formed Thai politics in both agent and agenda. As a sequence, it induced the Thai political crisis and the Coup d'état after that.
Moreover, the political instability is shown the adverse effect to the economic growth as mentioned by Alesina et al. (1996);de Haan and Siermann (1996); Mancur (1991) and McGuire and Olson (1996). Yagci (2018) proposed that the Coup d'états are seemed to be the causes of economic consequences in Turkey. By comparison with the global economic growth, a negative causal effect on Turkish economic growth found during the period of Coup d'état events. Civilize et al. (2015b) indicated that under military rule, the SET index performance would be increased. However, this study showed only the stock market term that lack of conclusion on the military regime and foreign exchange markets.
Furthermore, Lumiajiak et al. (2014) indicated that the Coup d'état 2006 in Thailand has no adversely affected to the SET index and the exchange rate of THB/USD markets. However, the studies individually tested on the SET index and exchange rate of THB/USD by its return volatility and volume. The results then show a negative relationship between the SET index and exchange rate of THB/USD, and the cointegration has not been proven. As a sequence, the effect of Coup d'état might be misspecified.

Data
We collect the data starting from July 02, 1997, because Thailand has changed the regime from pegged to a managed float. As a sequence, we can analyze two events of Coup d'état. Then, we divide the data between the daily SET index and the daily exchange rate of THB/USD into four subperiod, as shown in figure 1. The dataset is separated into two pairs of equal periods.  22, 201422, , to January 29, 2016, that includes 442 observations. Hence, the dataset will be able to analyze for cointegration tests and specified the events with the time horizons.
Notes: This figure describes the daily log scale of the exchange rate of THB/USD versus date on the left-hand side axis and the SET index versus date on the right-hand side axis. In the plot, the black line indicates the time series of the exchange rate of THB/USD and the gray line indicates the time series of the SET index. Moreover, the vertical dash lines indicate the selected events on time series that will be investigated. The daily data are collected from datastream and converted to a logarithmic scale. Table 1 presents the statistics of the exchange rate of THB/USD returns and SET index returns. The standard deviations show the stock market returns that are more volatile than the exchange rate of THB/USD returns. The Jarque-Bera tests show significant normality in all series.

Unit root test and cointegration test
In this study, the Augmented Dickey-Fuller (ADF) tests with the drift model proposed by Dickey and Fuller (1981) is used to test for stationarity as following ∆ = + + ∑ ∆ + where is the constant term, ∆ is the first difference of time series data, is the lag order terms of the autoregressive process, and is the error term. We use the Akaike's information criterion (AIC) to avoid biased estimation of the optimal lag length. From table 2, all series show non-stationarity in the levels or I(0) processes, but stationary in the first differences or I(1) processes. As a result, the cointegration tests are enabled to test for the long-run relationship between the exchange rate and the stock market. indicates significance at the 1% levels. The null hypothesis of ADF test is that the series is non-stationary or a unit root (γ =0) and against the alternative that stationary (γ ≠ 0).
According to the review of the long-run relationship proposed by Gonzalo (1994), Johansen's test performs as the best estimator. As a sequence, the cointegration model found by Johansen (1988Johansen ( , 1991 is used for this study. The Johansen's test analyzes the multivariate maximum likelihood on the vector error correction model (VEC) as shown following ∆ = Π + Γ ∆ + ⋯ + Γ ∆ + Ψ + where ∆ is the vector (K × 1), Π is Ω • Γ′, where Ω defines the matrix of error-correction (K × K) and Γ defines the relation of cointegration parameters, is the lag order terms of VEC model, is the vector of nonstochastic variables (K × 1), and is vector of error term (K × 1) as follows ~(0, ) , where defines as the innovations covariance matrix. Also, the nonstochastic variables, seasonal dummy variables, and dummy variables are excluded from the model.  ** indicates significance at the 5% levels. The null hypothesis of the trace tests is that there are at most r cointegrating relations and against the alternative of p cointegrating relations. The null hypothesis of the maximum eigenvalue test is that there are r cointegrating relations and against the alternative that r + 1 cointegrating relations.

Granger causality test
From the Granger causality test proposed by Granger (1969) is applied to the analysis of a causal relationship between the exchange rate and the stock market.  *** , ** and * indicates significance at 1%, 5%, and 10% levels, respectively. The null hypothesis of the Granger causality is that the exchange rate of THB/USD (SET index) do not Granger-cause the SET index (exchange rate of THB/USD) and against the alternative that the exchange rate of THB/USD (SET index) do Granger-cause the SET index (exchange rate of THB/USD).

Impulse-response functions
We apply the impulse-response functions to verify a dynamic system in the short-run. As can be seen from figure 2 and 3, the exchange rate of THB/USD responses a negative shock to the SET index. On the other side, the SET index responses a significant low negative shock to the exchange rate of THB/USD. The relationships in all periods remain stable at zero after five days. In the short run, however, the shock from the exchange rate of THB/USD to the SET index shows a positive association only during Coup d'état 2014. For the response to itself, both the exchange rate of THB/USD and the SET index show a significant positive shock then a quick react to zero. Consequently, all the impulse-response functions test show not persistent in more extended periods.

Discussions
With the most frequent amount of Coup d'état in the Southeast Asia region, the analysis between these political issues and the financial market in Thailand becomes exceptionally interesting. However, after the Asian crisis on July 02, 1997, Thai Baht had been transformed from a pegged to a managed float regime.  Yagci (2018). When the military intervention attempts, there will be adversely affecting economic growth compared to the global trend. Although there were several massive street demonstrations against the government in Thailand during both periods of pre-Coup d'état, the financial market and the exchange rate acted as a steady condition. It may explain that the Coup d'états provoke the lower level of investor confidence and economic performance (Narayan & Prasad, 2007;Jayaraman & Choong, 2015).
As following the results of long-run cointegration during pre-Coup d'état periods, we further investigate the Granger causality test. The test provides that which parameter is better to predict another whether the SET index or the exchange rate of THB/USD. The results from table 4 demonstrate the uni-directional causality in pre-Coup d'état 2006, which the SET index can be predicting the exchange rate of THB/USD. On the other hand, pre-Coup d'état 2014 also provides the uni-directional causality, but the exchange rate of THB/USD can be predicting the SET index. Consequently, we cannot ascertain whether the SET index or the exchange rate of THB/USD is better to predict in long-run. We then extend the study into the short-run. In the short run, we implement the impulse-response functions to investigate the short-run interactions between the SET index and the exchange rate of THB/USD. The results from figure 2 and 3 show that the exchange rate of THB/USD is profoundly affecting the SET index while the SET index is weakly affecting the exchange rate of THB/USD.  (2017), which mentioned that the government from the Coup d'état generates economic instability. Also, our findings reinforce the study of Jayaraman and Choong (2015) that the military coups provide financial market uncertainty.

Implications and Conclusion
In this study, we investigate and analyze between the exchange rate of Thai Baht and US dollar and the SET index during the recent of the Coup d'état in Thailand (2006Thailand ( -2016 Granger-cause the exchange rate of THB/USD. In short-run, the SET index shocks in all investigated periods show a negative effect on the exchange rate of THB/USD, except the Coup d'état 2014 shows a positive effect. In particular, our results are consistent with Dunning (2005c) that the change of political regime influences the financial market.
In summary, on the one hand, the evidence shows that the long-run relationship between the SET index and the exchange rate of THB/USD do not exist during the Coup d'état periods. On the other hand, the short-run results of the shocks from the exchange rate of THB/USD to the SET index show both negative and positive effects during the Coup d'état periods. Therefore, the period of political instability event adversely affects the relationship between the stock market and the exchange rate. We can conclude that, when the military has been taken place, the financial or economic strategies that compose of the stock market and the exchange rate will be mispricing in both long-run and short-run relationships.