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

Abstract

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.

Citation

Ajmi, H. and Arfaoui, N. (2021), "Effects of the political risk on Bitcoin return and volatility: evidence from the 2016 US presidential election", Journal of Financial Economic Policy, Vol. 13 No. 1, pp. 94-115. https://doi.org/10.1108/JFEP-01-2020-0010