The paper was written jointly during Limin Guo's 1998–1999 visit to NYU as a visiting scholar. We would like to thank Kent Hargis, Harold Kim, Bernie Young Burton Malkiel for helpful discussions. We are grateful to Steven Radelet and Jeffrey Sachs for providing me with the data set. We are also grateful to Sreedhar Bharath for able research assistance. We would also like to thank the editor for his careful reading of our work, insightful comments and valuable suggestions that have helped us to further improve the quality of our paper. Correspondence: Jianping Mei.
Political Uncertainty, Financial Crisis and Market Volatility
Article first published online: 12 NOV 2004
European Financial Management
Volume 10, Issue 4, pages 639–657, December 2004
How to Cite
Mei, J. and Guo, L. (2004), Political Uncertainty, Financial Crisis and Market Volatility. European Financial Management, 10: 639–657. doi: 10.1111/j.1354-7798.2004.00269.x
- Issue published online: 12 NOV 2004
- Article first published online: 12 NOV 2004
- political elections;
- currency devaluation;
- market contagion
This paper examines the impact of political uncertainty on financial crises using a panel of 22 emerging markets. By examining political election cycles, we find that eight out of nine of the financial crises happened during the periods of political election and transition. Using a combination of probit and switching regression analysis, we find that there is a significant relationship between political election and financial crisis after controlling for differences in economic and financial conditions. We observe increased market volatility during political election and transition periods. Our results suggest that political uncertainty could be a major contributing factor to financial crisis. Thus, politics does matter in emerging markets. Since the odds of financial crisis tend to be much larger during the political election periods, institutional investors should take that into account when making emerging market investment during those time periods.