Asymmetries in the Responses of Investors within Foreign Exchange Markets to Political Events: Evidence from Nigeria
25 Pages Posted: 23 Mar 2015 Last revised: 5 Jun 2015
Date Written: June 4, 2015
Abstract
I find evidence that while a political event which has implications for Central Bank Autonomy (CBA event) induces currency depreciation that is accompanied by an increase in currency inventory risk, a political event that can be interpreted as evidence of partisanship (partisanship event) induces depreciation that is evidence of an increase in currency valuation uncertainty. Asymmetries in investors' responses are evident in my finding that while exchange rate volatility decreases in response to a CBA event, a partisanship event induces an increase in exchange rate volatility. Also, while CBA events are accompanied by a decrease in currency information risk (regardless of increase in inventory risk), partisanship events are accompanied by an increase in currency information risk. Given both CBA and partisanship events result in currency depreciation, my findings provide evidence of significant losses in purchasing power or social welfare from political events.
Keywords: Exchange Rates, Central Bank, Autonomy, Volatility, Inventory or Information Risk, Partisanship, Efficiency, Bid-Ask Spreads
JEL Classification: E44, E58
Suggested Citation: Suggested Citation