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. There are five sections involved in this chapter, Section 2.1 discusses the theoretical framework, Section 2.2 briefly explains the empirical model used, Section 2.3 dissects the empirical testing procedures, Section 2.4 reviews the empirical evidence and Section 2.4 concludes the study. In 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 scholar to use the concept of EMH in stock market performance. When the prices of all securities fully reflect all available information, the market is efficient. This means that whatever new information comes to 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 that violate the concept of EMH. The phenomenon is known as market anomalies. For example, calendar effect, P/E effect, and size effect. Market anomalies are nothing new to investors as they happen all the time in the world of the stock market. In this study, the abnormal return during the election period is considered a market anomaly because it broke the concept of EMH. Therefore, it is interesting to know which market form this scenario belongs to... half of the paper... different testing procedures have been employed to study the impact of general elections on stock returns such as OLS method, conventional t-test, of causality and the GARCH(p, q)-M model. The causality test is used to check whether general elections are the ones that influence stock returns or vice versa. Meanwhile, the OLS method is to test whether the stock market behavior is significantly different before and after the general election. Finally, the GARCH (p, q)-M model is considered a suitable model for measuring short-term and long-term memory in returns. Finally, several empirical evidences have been obtained from previous literature reviews. Some have argued that there is a significant difference between stock returns during election periods. Furthermore, some researchers have found that stock returns have a positive effect under the governing coalition rather than under the opposition coalition.