Political uncertainty and FX volatility during US presidential elections: evidence from prediction market

This paper studies the effects of political uncertainty on the conditional volatility of the return on the Trade Weighted US Dollar Index during the homestretches of the last seven US presidential elections. Using daily probability data drawn from the Iowa Electronic Markets, I document that, first of all, higher uncertainty about the election outcome is attributed to a higher volatility of the US Dollar. Secondly, my empirical findings suggest that higher probabilities for a Republican candidate might decrease the volatility. Thirdly, I conclude that the volatility of the US Dollar is higher during the elections which lead to a change in political control between the parties, and in which there is no incumbent candidate running for the presidency. Overall, the findings of my thesis shed light on the connection between market anxiety and the uncertainty that surrounds political elections, and imply that the foreign exchange rates react to the changing betting odds of the US presidential elections