Exchange Rates and Political Uncertainty: The Brexit Case

Manasse, Paolo and Moramarco, Graziano and Trigilia, Giulio (2020) Exchange Rates and Political Uncertainty: The Brexit Case. Bologna: Dipartimento di Scienze economiche, p. 55. DOI 10.6092/unibo/amsacta/6327. In: Quaderni - Working Paper DSE (1141). ISSN 2282-6483.
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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 simple portfolio model which predicts that an increase in the Leave probability triggers a depreciation of the British Pound, both on account of exchange rate expectations and of political risk. We estimate the model for multilateral and bilateral British Pound exchange rates. The results confirm the model’s main implications. When we extend the analysis to a portfolio model of multiple currencies, we find that the cross-currencies restrictions implied by the theory are not rejected by our system estimation. Moreover, the joint estimates of the multi-currency model in the presence of time-varying political risk premium are in many cases consistent with the Uncovered Interest Parity.

Abstract
Document type
Monograph (Working Paper)
Creators
CreatorsAffiliationORCID
Manasse, PaoloUniversità di Bologna0000-0002-9238-3584
Moramarco, GrazianoUniversità di Bologna0000-0003-4476-4267
Trigilia, GiulioUniversity of Rochester0000-0002-9865-4904
Keywords
Brexit, Exchange Rates, Political Risk, Time-Varying Risk Premium, Uncovered Interest Parity
Subjects
ISSN
2282-6483
DOI
Deposit date
04 Feb 2020 11:06
Last modified
04 Feb 2020 11:06
URI

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