Exchange rates and binary political events

Pedro Venturi, Alex Ferreira, Arie Gozluklu and Yujing Gong

Oxford Economic Papers, 2024, vol. 76, issue 3, 797-822

Abstract: This article introduces a rational expectations model that explains exchange rate dynamics and the predictability of forecast errors using private (aggregated via order flow) and public (probabilities of a binary event) information. We test the model for the periods leading up to the presidential impeachment vote in Brazil, the Brexit Referendum, and Donald Trump’s election in 2016. Proxies of the physical probabilities of these events reveal that they are a crucial source of pricing information for the BRL, GBP, and MXN currency pairs with the US dollar. They also explain forecast errors. The information content of order flow changes before and after an actual regime change resolves uncertainty.

JEL-codes: D84 F31 F37 G14 (search for similar items in EconPapers)
Date: 2024
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