Elections and Asset Prices

One interesting correlation, as pointed out by Clines in the NYT, is between the Mexican peso’s value against the USD and the probability that Donald J. Trump will win, as judged by the markets.

I thought it of interest to do kind of a case study, given the substantial move in the election prediction markets, from yesterday to today, as measured in the Iowa Election Markets.

Figure 1: USD/MXN exchange rate (blue), and odds of Democratic win in Presidential election, end of day (red). Observation for 10/8/2016 is as of 3PM Eastern time. Exchange rate defined so up is MXN appreciation. Source: FRED, Pacific Exchange Services, and Iowa Election Markets.

(When reading the graph, recall the exchange rate data is for noon, and the odds are for 11:59PM.)

If the odds remain at current levels throughout the weekend, we should anticipate a jump in the USD/MXN exchange rate on Monday.