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Exchange rates and binary political events

Author

Listed:
  • Pedro Venturi
  • Alex Ferreira
  • Arie Gozluklu
  • Yujing Gong

Abstract

This article introduces a rational expectations model that explains exchange rate dynamics and the predictability of forecast errors using private (aggregated via order flow) and public (probabilities of a binary event) information. We test the model for the periods leading up to the presidential impeachment vote in Brazil, the Brexit Referendum, and Donald Trump’s election in 2016. Proxies of the physical probabilities of these events reveal that they are a crucial source of pricing information for the BRL, GBP, and MXN currency pairs with the US dollar. They also explain forecast errors. The information content of order flow changes before and after an actual regime change resolves uncertainty.

Suggested Citation

  • Pedro Venturi & Alex Ferreira & Arie Gozluklu & Yujing Gong, 2024. "Exchange rates and binary political events," Oxford Economic Papers, Oxford University Press, vol. 76(3), pages 797-822.
    • Handle: RePEc:oup:oxecpp:v:76:y:2024:i:3:p:797-822.
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    File URL: http://hdl.handle.net/10.1093/oep/gpad039
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    More about this item

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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