Political Volatility and Capital Markets: Evidence from Transition

This paper looks at the effects of political volatility in transition economies to ascertain how nascent political institutions affect fledgling capital markets. Asymmetric (GJR) GARCH modeling of monthly data was taken for 21 transition economies on financial volatility, political volatility, and monetary policy to test the drivers of financial volatility in transition. The key implication from these results is that political stability needs to be tended to both in the formal realm and the informal realm in order to avoid potentially damaging financial volatility. The need for consistent political institutions remains in transition economies as much as in developed countries.