Authors: Dimitrios Asteriou, Augustinos Dimitras, Antonios Sarantidis

Title: Political Instability and Exchange Rate Volatility: Evidence from G7 countries

Abstract

This paper examines the relationship between political instability and exchange rate volatility.The aim of this paper is to quantify and to analyze the effects that political instability has on the exchange rates volatility of the G7 countries. A political  instability index is constructed by employing the principal component analysis in order to measure political uncertainty. This index uses 27 different variables that are mainly used and mentioned in the corresponding literature of political instability. The sample is based on time series data covering the period from 1999-2015. In the empirical part of the paper the methodologies of OLS regressions and GARCH-M (1,1) are employed, producing some new interrestinf results. The results show that higher rates of political instability lead to an increase of exchange rates. The paper provides to investors and policy makers new evidence on the effects that political uncertainty has on the volatility of exchange rates.