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Political uncertainty and currency markets

Author

Listed:
  • Markus Leippold

    (University of Zurich; Swiss Finance Institute)

  • Felix Matthys

    (ITAM)

  • Philippe Mueller

    (Warwick Business School Finance Group)

  • Michal Svaton

    (University of Zurich - Department of Banking and Finance)

Abstract

We study the impact of political uncertainty on exchange rates and the pricing of currency options. While we do not find clear directional patterns in exchange rates, option prices reflect the heightened political uncertainty around elections and referendums for a cross-section of 30 countries. In general, FX options whose lives span political events are more expensive, with the effect being even stronger for options that protect against domestic currency depreciation.

Suggested Citation

  • Markus Leippold & Felix Matthys & Philippe Mueller & Michal Svaton, 2024. "Political uncertainty and currency markets," Swiss Finance Institute Research Paper Series 24-13, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp2413
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    More about this item

    Keywords

    FX option pricing; Volatility and skewness; electoral systems; political uncertainty;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior

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