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Political uncertainty and financial market uncertainty in an Australian context

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  • Smales, Lee A.

Abstract

This paper seeks to investigate the influence of political uncertainty, surrounding the Australian federal election cycle, on financial market uncertainty. Measures of political uncertainty are constructed and their relationship with market uncertainty, as measured by implied volatility, explored. Empirical evidence suggests that increasing (decreasing) levels of uncertainty around the election induce higher (lower) levels of market uncertainty. An increasing likelihood of the incumbent party, whose economic policies are presumably well-known, winning the election, reduces market uncertainty. This relationship is stronger when political uncertainty is highest, when the business cycle contracting, and when the level of economic risk is high. Higher levels of political uncertainty tend to be associated with declining levels of outstanding debt, and lower issuance of long-term Government debt, driven by falling demand and higher yields.

Suggested Citation

  • Smales, Lee A., 2014. "Political uncertainty and financial market uncertainty in an Australian context," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 32(C), pages 415-435.
  • Handle: RePEc:eee:intfin:v:32:y:2014:i:c:p:415-435
    DOI: 10.1016/j.intfin.2014.07.002
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    References listed on IDEAS

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    Cited by:

    1. repec:ove:journl:aid:11278 is not listed on IDEAS
    2. Julia Darby & Graeme Roy, 2019. "Political uncertainty and stock market volatility: new evidence from the 2014 Scottish Independence Referendum," Scottish Journal of Political Economy, Scottish Economic Society, vol. 66(2), pages 314-330, May.
    3. repec:bla:irvfin:v:17:y:2017:i:3:p:451-459 is not listed on IDEAS
    4. Gozgor, Giray & Lau, Chi Keung Marco & Bilgin, Mehmet Huseyin, 2016. "Commodity markets volatility transmission: Roles of risk perceptions and uncertainty in financial markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 44(C), pages 35-45.
    5. repec:asi:aeafrj:2019:p:1032-1042 is not listed on IDEAS

    More about this item

    Keywords

    Political uncertainty; Financial market uncertainty; Implied volatility; Stock markets; Debt issuance;

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents

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