Ripple effect of United States political uncertainty on developed and emerging markets: unveiling financial turbulence

This paper investigates the impact of political uncertainty due to US presidential elections on financial volatility, spillover effects, and interconnectedness in emerging and developed markets. The study utilises daily data of representative indices from developed markets (US, Japan, and Germany) as well as emerging markets (China and India) over the period of 2000 to 2024, encompassing seven US presidential elections. The findings of the study show that developed markets have higher volatility persistence with slower decay rates than emerging markets, and emerging markets often demonstrate better risk-adjusted returns relative to developed markets. Developed markets exhibit higher and more sustained volatility spillovers and stronger long-term interconnectedness with the US financial market compared to emerging markets. The combined analysis of the GARCH (1,1), TVP-VAR (Diebold and Yilmaz spillover index), DCC & ADCC GARCH models, and sensitivity analysis support these findings, confirming the significant contribution of US political uncertainty in financial volatility, along with its asymmetric impact on the spillover and interconnectedness among global financial markets. These findings have important implications for investors developing optimal investment strategies to manage direct or indirect exposure to volatility risk during politically tumultuous periods and for policymakers framing policies to attract foreign investment vis-à-vis safeguards against external shocks associated with US political uncertainty.