Political uncertainty and currency markets

69 Pages Posted: 5 Feb 2024

See all articles by Markus Leippold

Markus Leippold

University of Zurich; Swiss Finance Institute

Felix Matthys

ITAM

Philippe Mueller

Warwick Business School Finance Group

Michal Svaton

University of Zurich - Department Finance

Date Written: January 14, 2024

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.

Keywords: FX option pricing; Volatility and skewness; electoral systems; political uncertainty

JEL Classification: G14, G15, G13, F31, C58, D72

Suggested Citation

Leippold, Markus and Matthys, Felix and Mueller, Philippe and Svaton, Michal, Political uncertainty and currency markets (January 14, 2024). Swiss Finance Institute Research Paper No. 24-13, WBS Finance Group Research Paper, Available at SSRN: https://ssrn.com/abstract=4694562 or http://dx.doi.org/10.2139/ssrn.4694562

Markus Leippold (Contact Author)

University of Zurich ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Felix Matthys

ITAM ( email )

Av. Camino a Sta. Teresa 930
Col. Héroes de Padierna
Mexico City, D.F. 01000, Federal District 01080
Mexico
+52 155 1394 6562 (Phone)

Philippe Mueller

Warwick Business School Finance Group ( email )

Gibbet Hill Rd
Coventry, CV4 7AL
Great Britain

Michal Svaton

University of Zurich - Department Finance ( email )

Schönberggasse 1
Zürich, 8001
Switzerland

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