Presidential economic approval rating and global foreign exchange market volatility

Abstract

This paper examines the influence of presidential economic approval rating (PEAR) on the volatility of 15 major foreign exchange (FX) markets. The study reveals that the PEAR index serves as an insightful predictor for forecasting certain FX market volatilities, demonstrating predictive accuracy both in- and out-of-sample period. This predictability endures over longer horizons and withstands various robustness assessments. Notably, the forecasting efficacy of PEAR surpasses that of uncertainty factors and macroeconomic indicators. Additionally, we illustrate that a combined forecast incorporating all predictors enhances forecasting robustness. Finally, our findings indicate that PEAR can also elucidate future jump risks and returns in FX markets.