This paper studies the impact of political risk on exchange rates. We focus on the Brexit Referendum as it provides a natural experiment where both exchange rate expectations and a time-varying political risk factor can be measured directly. We build a portfolio model that relates changes in the Leave probability to changes of the British pound's market price, both via expectations and via a political risk factor. We estimate the model for multilateral and bilateral British pound exchange rates. We find that the Leave probability predicts a depreciation of the pound, consistent with the outcome post-referendum, and that the time-varying political risk affects exchange rates independently.
Exchange rates and political uncertainty: the Brexit case / Manasse, Paolo; Moramarco, Graziano; Trigilia, Giulio. - In: ECONOMICA. - ISSN 0013-0427. - ELETTRONICO. - 91:362(2024), pp. 621-652. [10.1111/ecca.12509]
Exchange rates and political uncertainty: the Brexit case
Manasse, Paolo
;Moramarco, Graziano;
2024
Abstract
This paper studies the impact of political risk on exchange rates. We focus on the Brexit Referendum as it provides a natural experiment where both exchange rate expectations and a time-varying political risk factor can be measured directly. We build a portfolio model that relates changes in the Leave probability to changes of the British pound's market price, both via expectations and via a political risk factor. We estimate the model for multilateral and bilateral British pound exchange rates. We find that the Leave probability predicts a depreciation of the pound, consistent with the outcome post-referendum, and that the time-varying political risk affects exchange rates independently.File | Dimensione | Formato | |
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