The US Presidential Elections and the Uncertainty on the International Stock Market: Predicting the VIX Index

Democratic change of ruling elites in economic hegemon determines political and economic direction of development for the entire country and partially of world society, still political risks, associated with that proses, are rarely included to econometriс models aimed at pricing geopolitical risks that are becoming increasingly complex. Moreover, IR literature signifies several criteria and definitions of economic hegemon, but seems to lack verification mechanism. The research attempts to fit that gaps and show that inclusion of political index as an additional explanatory variable in the model of the expected volatility measured by VIX, can increase quality of the model predictions. The fact of increasing performance of the model can be used as criteria for economic hegemony. Main methods of research include a quantification of political risk, GARCH modeling and evaluation of out-of-sample forecasts with Theil’s U test and predictive power test. Work found that GARCH models with political uncertainty variable can outperform plain GARCH model. That finding, firstly, verifies the US economic hegemonic status, secondly, allows to increase the predictability of the VIX index during US presidential elections, finally, contributes to the literature showing that political risks are priced by the options market. It is expected that further research on the issue would allow to derive accurate political forecasts and expected policy changes from the financial market.