CHAPTER TWO LITERATURE REVIEW2.0 IntroductionThe study explores the impact of general elections on the performance of FBM KLCI. Chapter two presents the review of previous literature related to this study. This chapter includes five sections, section 2.1 discusses the theoretical framework, section 2.2 briefly explains the empirical model used, section 2.3 conceals the empirical testing procedures, section 2.4 reviews the empirical evidence and section 2.4 concludes the study.2.1 Theoretical frameworkIn previous studies, there are some theories put forward by researchers to explain the impact of general elections on stock returns. The most commonly used theories are the efficient market hypothesis model and the uncertain information hypothesis model. 2.1.1 Efficient Market Hypothesis (EMH) Theory The EMH model was first applied by Fama in 1965. He was the first researcher to use the concept of EMH in stock. market performance. When all security prices fully reflect all available information, the market is said to be efficient. This means that any new information arriving in the stock market, the stock price should not react based on that particular information under efficient market conditions. However, there appear to be several phenomena violating the concept of EMH. This phenomenon is known as market anomalies. For example, the calendar effect, the P/E effect and the size effect. Market anomalies are nothing new to investors because they always occur in the stock market world. In this study, the abnormal return during the election period is considered as a market anomaly because it breaks the concept of EMH. Therefore, it is interesting to know which market form this scenario belongs to...... middle of paper ...... different testing procedures have been used to study the impact of general elections on stock returns such as OLS method, conventional t-test, causality test and GARCH(p, q)-M model. The causality test is used to check whether general elections are the ones that affect stock returns or vice versa. At the same time, the OLS method involves testing whether the behavior of the stock market is significantly different before and after the general election. Finally, the GARCH(p,q)-M model is considered a suitable model to measure short-term and long-term memory for feedback. Finally, different empirical evidence was obtained from previous literature reviews. Some have said there are significant differences between stock market returns during election periods. Additionally, some researchers have found that stock returns have a positive effect under the ruling coalition rather than the opposition coalition..