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Sociopolitical instability, volatility, and the bid-ask spread: Evidence from the free market for dollars in Poland

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  • Ali Kutan
  • Su Zhou

Abstract

This paper provides empirical evidence that the weekly bid-ask spread in the Polish free foreign exchange market is heavily affected by the intensity of sociopolitical unrest in this country. A GARCH model is estimated to study the volatility of the free market for dollars in Poland from the third week of October 1988 to the fourth week of January 1990. This period is interesting and important because it includes social and political events under two different government regimes. Empirical evidence suggests that significant sociopolitical turmoil appears to increase the volatility of the market and consequently create substantial changes in the spread. The results of this paper may represent valuable information for other reforming countries. Copyright Kluwer Academic Publishers 1995

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Bibliographic Info

Article provided by Springer in its journal Open Economies Review.

Volume (Year): 6 (1995)
Issue (Month): 3 (July)
Pages: 225-236

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Handle: RePEc:kap:openec:v:6:y:1995:i:3:p:225-236

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Web page: http://www.springerlink.com/link.asp?id=100323

Related research

Keywords: developing countries; political and social unrest; GARCH; foreign exchange market volatility;

References

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  1. Melvin, Michael & Shiau, Chin-Duu, 1990. "Property Rights, Development, and Velocity in Developing Countries," Economic Development and Cultural Change, University of Chicago Press, vol. 38(4), pages 821-32, July.
  2. Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
  3. Blomberg, S Brock, 1996. "Growth, Political Instability and the Defence Burden," Economica, London School of Economics and Political Science, vol. 63(252), pages 649-72, November.
  4. Roubini, Nouriel & Swagel, Phillip & Ozler, Sule & Alesina, Alberto, 1996. "Political Instability and Economic Growth," Scholarly Articles 4553024, Harvard University Department of Economics.
  5. Goodhart, C. A. E. & Figliuoli, L., 1991. "Every minute counts in financial markets," Journal of International Money and Finance, Elsevier, vol. 10(1), pages 23-52, March.
  6. Glassman, Debra, 1987. "Exchange rate risk and transactions costs: Evidence from bid-ask spreads," Journal of International Money and Finance, Elsevier, vol. 6(4), pages 479-490, December.
  7. Melvin, Michael & Tan, Kok-Hui, 1996. "Foreign Exchange Market Bid-Ask Spreads and the Market Price of Social Unrest," Oxford Economic Papers, Oxford University Press, vol. 48(2), pages 329-41, April.
  8. Alesina, Alberto, et al, 1996. " Political Instability and Economic Growth," Journal of Economic Growth, Springer, vol. 1(2), pages 189-211, June.
  9. Boothe, Paul M, 1988. "Exchange Rate Risk and the Bid-Ask Spread: A Seven Country Comparison," Economic Inquiry, Western Economic Association International, vol. 26(3), pages 485-92, July.
  10. Bollerslev, Tim & Chou, Ray Y. & Kroner, Kenneth F., 1992. "ARCH modeling in finance : A review of the theory and empirical evidence," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 5-59.
  11. Bollerslev, Tim & Melvin, Michael, 1994. "Bid--ask spreads and volatility in the foreign exchange market : An empirical analysis," Journal of International Economics, Elsevier, vol. 36(3-4), pages 355-372, May.
  12. Copeland, Thomas E & Galai, Dan, 1983. " Information Effects on the Bid-Ask Spread," Journal of Finance, American Finance Association, vol. 38(5), pages 1457-69, December.
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Cited by:
  1. Brada, Josef C. & Kutan, Ali M. & Yigit, Taner M., 2004. "The effects of transition and political instability on foreign direct investment inflows: Central Europe and the Balkans," ZEI Working Papers B 33-2004, ZEI - Center for European Integration Studies, University of Bonn.

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