Firm-level political risk and asymmetric volatility

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Authors

Aye, Goodness Chioma
Balcilar, Mehmet
Demirer, Riza
Gupta, Rangan

Journal Title

Journal ISSN

Volume Title

Publisher

Elsevier

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.

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Keywords

Aggregate realized volatility, Firm-level political risk, Quantile causality, S&P 500

Sustainable Development Goals

Citation

Aye, G.C., Balcilar, M., Demirer, R. & Gupta, R. 2018, 'Firm-level political risk and asymmetric volatility', The Journal of Economic Asymmetries, vol. 18, pp. e00110, pp. 1-7.