The impact of an unexpected political resignation on exchange rates

Abstract

Based on the theory of economic regulation, political shocks are examined as unexpected events in the light of the efficient markets hypothesis and a political resignation is taken as an example of such an event. The Hon. J. Dawkins MP, resigned as the Federal Treasurer of the Australian government on Friday, 17 December 1993. There have been a number of studies on the effect of economic and political events on stock prices. This study considers the impact of Dawkin's resignation on the foreign exchange rates of the major traded currencies in Australia. The traditional event study methodology, based on the market model, and the lesser-used multivariate methodology of seemingly unrelated regressions are used for the analysis. The sample of currencies is considered both as a portfolio and on an individual basis, with efficiency of the currency markets being tested for anticipatory, event-related and persistence effects. The paper concludes by contrasting the findings of the two methodologies. The study reports significant results using the traditional method for the event period with insignificant results being reported for the other method.