Political Uncertainty in Developed and Emerging Markets

Abstract

Following Pástor and Veronesi (2012, 2013), we test for a relationship between political uncertainty and financial market risk. We extended Pástor and Veronesi's work by considering a panel of international markets, including emerging markets, which may face greater political uncertainty. Our results are less clear-cut than the original (USA) results, finding that while volatility is impacted by political uncertainty, the same can not be said for value-weighted average pairwise correlations. Finally, we disaggregated our panel and examine the countries individually. The results here are heterogeneous while some countries support the policy to market risk transmission hypothesis, others may do not.

Keywords: Political uncertainty, volatility, correlation, economic conditions.

JEL Classification: G12, G15, G18