Effects of the political risk on Bitcoin return and volatility: evidence from the 2016 US presidential election

• Main Authors: Ajmi, Hechem, Arfaoui, Nadia
• Format: Article
• Language: English; English
• Published: Emerald Publishing Limited 2020
• Subjects: HB131 Methodology.Mathematical economics. Quantitative methods; HB221 Price; HG4501 Stocks, investment, speculation
• Online Access: http://irep.iium.edu.my/86668/7/86668_Effects%20of%20the%20political%20risk%20on%20Bitcoin_SCOPUS.pdf; http://irep.iium.edu.my/86668/13/86668_Effects%20of%20the%20political%20risk%20on%20Bitcoin.pdf; http://irep.iium.edu.my/86668/; https://www.emerald.com/insight/content/doi/10.1108/JFEP-01-2020-0010/full/html
• Institution: Universiti Islam Antarabangsa Malaysia

Purpose – This paper aims to investigate the effect of the political risk on Bitcoin return and volatility during the 2016 US pre-election and post-election periods. Design/methodology/approach – A daily composite political risk index is calculated by using the principal component analysis and Google Trends. A quantile regression approach is adopted to assess the effect of the political risk index on Bitcoin return and volatility for both periods subject to market conditions. Findings – Findings reveal that the political risk index tends to increase when moving from the pre-election period to the post-election one. This is mostly attributed to the new challenges faced by the new elected government. During the pre-election period, the quantiles regression shows that the political risk index negatively affects Bitcoin return when the market is bearish, whereas a positive impact on volatility is found in bearish and bullish markets. When the political situation becomes severer during the post-election period, the quantiles plots show that the increase of the political risk index leads to a significant increase of Bitcoin return, whereas Bitcoin volatility remains relatively stable. This means that Bitcoin can be adopted as a hedging tool when the political situation becomes severer. Originality/value – Comparing to the existed studies in the field, this paper considers Google trends as a main source to assess the daily composite political risk index during the 2016 US presidential election.