The Impact of Government Policy Changes on Stock Market Forecasting

Abstract

Financial analysts and investors often seek to understand government policies and their effects on stock market before making corresponding decisions. Several studies analysed the effect of government policy changes to Malaysia KLCI Index but not sectorial indexes. Therefore, this study aims to understand the effect of government policies such as Overnight Policy Rate (OPR), Budget 2020, Goods and Services Tax (GST), Sales and Servies Tax (SST) and Movement Control Order (MCO) on forecasting of Malaysia Consumer Product Index, Industrial Product Index and Finance Index. The forecasting methods used were Naïve, double-exponential smoothing and Box–Jenkins approaches. This study utilized Microsoft Excel, Minitab and RStudio software to perform the forecasts. The impact of government policies on each forecast performance was evaluated using mean absolute error (MAE), mean absolute percentage error (MAPE) and trend change error. Comprehensively, MCO generated the biggest discrepancy to the three forecasting methods. In contrast, OPR announcement produced least disparity for the three indexes forecast. Budget 2020 announcement overall produced bullish trend after its announcement; hence if the trend before the announcement was contrary to the subsequent trend, it would create higher measurement errors. SST announcement had higher measurement errors than GST since the duration of announcement of GST, and its implementation was longer than that of SST. The MAE and MAPE for the government policies were low for the three forecasting methods, excluding MCO announcement; hence, it can be concluded that those forecast methods produced highly accurate forecast, and the effects of government policies on the three indexes were acceptable. Further studies are encouraged to focus on other Malaysia sectorial indexes and government policies.