Parliamentary Politics and Foreign Exchange Markets: The World According to GARCH

Authors


  • Authors' note: We are grateful to John Freeman, Jude Hays, Helmut Stix, Rob Franzese, and seminar participants at the Conference on Globalization and Democracy at the University of Minnesota, the Department of Political Science at Washington University, the Stern School of Business at New York University, and the Department of Politics at New York University. Leblang acknowledges research support from the National Science Foundation. Replication materials are available at http://sobek.colorado.edu/~leblang/datasets.html

Abstract

We investigate the impact of parliamentary political processes on exchange rate volatility. During periods of potential political change, currency traders have less certainty about the future of government policy. Consequently, these periods will be associated with higher volatility—a measure of the predictability of exchange rate movements. We estimate a series of fractionally integrated exponential generalized autoregressive conditional heteroscedasticity models on four currencies using daily data: the British pound, the French franc, the Belgian franc, and the Swedish krona. The results indicate that, while political events often increased exchange rate volatility, participation in the European Monetary System helped stabilize the level of the exchange rate and reduce volatility.

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