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Firm-Level Political Risk and Asymmetric Volatility

Goodness Aye (), Mehmet Balcilar, Riza Demirer and Rangan Gupta
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Goodness Aye: Department of Economics, University of Pretoria, Pretoria, South Africa

No 201861, Working Papers from University of Pretoria, Department of Economics

Abstract: This paper examines whether proxies of political risk exposure at the firm-level can predict the aggregate stock market volatility. Utilizing a nonparametric causality-in-quantiles test which not only guards against misspecification due to nonlinearity, but also tests for causality over the entire conditional distribution of the realized volatilities, we show that political risk exposure can serve as a strong predictor of bad realized volatility, while the causal effects are non-existent in the case of overall and good realized volatilities. Our findings provide novel insight to the well documented asymmetric volatility puzzle and the effect of political uncertainty on stock market fluctuations via the investor attention channel. The results also suggest that political risk exposure could be a contributing factor to jump risk in the cross-section of returns.

Keywords: Aggregate Realized Volatility; Firm-Level Political Risk, Quantile Causality, S&P 500. (search for similar items in EconPapers)
JEL-codes: C22 G1 (search for similar items in EconPapers)
Pages: 10 pages
Date: 2018-09
New Economics Papers: this item is included in nep-pol and nep-rmg
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Citations: View citations in EconPapers (9)

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