Political Volatility and Capital Markets: Evidence from Transition
“Informal political instability has much more substantial effects on financial markets in transition than formal changes, such as cabinet reshuffle or constitutional amendments.” This was a key research finding of CASE President Christopher Hartwell mentioned in a presentation to the “Economic Challenges in Enlarged Europe” conference in Tallinn last week.
Dr. Hartwell focused on how political events and institutions can impact capital markets, making a distinction between “formal” and “informal” political volatility; whereas “formal” factors include elections or constitutional changes, “informal” political volatility can include external conflicts or terrorism. Confining his analysis to Central and Eastern European (CEE) and former Soviet (FSU) economies, Dr. Hartwell noted that these countries experienced various political transitions and therefore were (and still are) more prone to financial volatility. Using advanced time-series financial modeling, Dr. Hartwell demonstrated how informal volatility had a greater impact on stock markets in transition than formal political volatility. However, he noted that monetary policy changes had the most significant and substantial effects on financial markets.
Dr. Hartwell stressed that the topic of formal and informal political changes has not yet been deeply investigated, and this field and his own work still needs further research.
The 7th International Conference “Economic Challenges in Enlarged Europe” was held on 14-16 June in Tallinn. Each year it aims to bring together top academics and high profile practitioners internationally to discuss relevant issues and current European economic affairs, and to popularize research in finance, business, and economics.
Read Christopher Hartwell's article published by HKUST Institute for Emerging Market Studies:
http://iems.ust.hk/wp-content/uploads/2015/03/IEMSWP2015-15.pdf
