Abstract
Abstract. The recent UK referendum results and subsequent initiation of Article 50 in the 2007 Lisbon Treaty set in motion the UK’s withdrawal from the European Union, acknowledge as Brexit. The result and subsequent action were unprecedented and for many unforeseeable. Apart from the political instability and division of the country, the complicated and long process of Brexit have both economic and financial consequences. With this in mind, we analyse the impact of Brexit on four main British financial markets: Equity, Foreign Exchange, Gold and Sovereign Debt; using daily data. We extendthe variance bound test proposed by Fakhry & Richter (2018) underpinned by an asymmetrical C-GARCH-m model of volatility. Unlike many in the past, we placed the emphasis on the stable markets; thus introducing the stable marketpre-condition hypothesis. We analyse the long and short run effects of Brexit on the stability of the UK’s financial market. Our results hint at a certain impact on the UK’s financial market in both the long and short runs on the market stability and hence efficiency. This seems to be dictated by the reaction of market participants to uncertainty surrounding the future of the UK
Keywords. Volatility test, Asymmetrical C-GARCH-m, Financial markets, Brexit.
JEL. C12, C58, D81, G01, G14, G15, G18, G40.References
Armour, J. (2017). Brexit and financial services. Oxford Review of Economic Policy, 33(S1), S54-S69. doi. 10.1093/oxrep/grx014
Belke, A., Dubova, I., & Osowski, T. (2016). Policy Uncertainty and International Financial Markets: The case of Brexit. Centre for European Policy Studies, CEPS Working Document No.429. [Retrieved from].
Black, F. (1976). Studies of Stock Market Volatility Changes. Proceedings of the Business and Economic Statistics Section, (pp.177-181), American Statistical Association.
Bollerslev, T. (1986). Generalized Autoregressive Conditional Heteroskedasticity. Journal of Econometrics, 1(3), 307-327. doi. 10.1016/0304-4076(86)90063-1
Brakman, S., Garretsen, H., & Kohl, T. (2017). Consequences of Brexit and options for a “Global Britain”. Papers in Regional Science, 97(1), 55-72. doi. 10.1111/pirs.12343
Brunnermeier, M.K. (2009). Deciphering the liquidity and credit crunch 2007-2008. The Journal of Economic Perspectives, 23(1), 77-100. doi. 10.1257/jep.23.1.77
Busch, B. & Matthes, J. (2016). Brexit - The Economic Impact: AMeta-Analysis. Institut der deutschen Wirtschaft Köln, IW-Report 10/2016. [Retrieved from].
Caballero, R.J., & Krishnamurthy, A. (2009). Global imbalances and financial fragility. American Economic Review, 99(2), 584-588. doi. 10.1257/aer.99.2.584
Carmassi, J., & Micossi, S. (2010). The Role of Politicians in Inciting Financial Markets to Attack the Eurozone. Centre for European Policy Studies, EuropEos Commentary No.4. [Retrieved from].
Chang, W.W. (2017). Brexit and its Economic Consequences. State University of New York Brexit Roundtable Discussion, Buffalo, April 10, 2017. [Retrieved from].
Colacito, R., Engle, R.F. & Ghysels, E. (2011). A component model for dynamic correlations. Journal of Econometrics, 164(1), 45-59. doi. 10.1016/j.jeconom.2011.02.013
Collignon, S., Esposito, P., & Lierse, H. (2013). European sovereign bailouts, political risk and the economic consequences of Mrs. Merkel. Journal of International Commerce, Economics and Policy, 4(2), 1350010:1-25. doi. 10.1142/S1793993313500105
Danielsson, J., Macrae, R., & Zigrand, J.P. (2016). On the financial market consequences of Brexit. LSE Research, [Retrieved from].
Danielsson, J., Macrae, R., & Micheler, E. (2017). Brexit and Systemic Risk. LSE Research, [Retrieved from].
De Bondt, W. (2000). The Psychology of Underreaction and Overreaction in World Equity Markets. in D.B. Keim & W.T. Ziemba (eds.), Security Market Imperfections in World Wide Equity Markets, (pp.65-69), Cambridge: Cambridge University Press.
Dhingra, S., Ottaviano, G., Sampson, T., & Reenen, J.V. (2016). The Consequences of Brexit for UK Trade and Living Standards. London School of Economics and Political Science, Centre for Economic Performance, CEP BREXIT Analysis No.2. [Retrieved from].
Diebold, F.X., & Yilmaz, K. (2009). Measuring financial asset return and volatility spillovers, with application to global equity markets. The Economic Journal, 119(534), 158-171. doi. 10.1111/j.1468-0297.2008.02208.x
Dorling, D. (2016). Brexit: the decision of a divided country. The BMJ, Ref:BMJ2016;354:i3697. doi. 10.1136/bmj.i3697
Emerson, M., Busse, M., Di Salvo, M., Gros, D., & Pelkmans, J. (2017). An Assessment of the Economic Impact of Brexit on the EU27. European Parliament, Study IP/A/IMCO/2016-13.
Engle, R.F., & Lee, G., (1999). A long-run and short-run component model of stock return volatility. In Engle, R.F., & H. White, (ed.) Cointegration, Causality and Forecasting—A Festschrift in Honour of Clive W.J. Granger, (pp.475-497), Oxford: Oxford University Press.
Engle, R.F., & Patton, A.J. (2001). What good is a volatility model? Quantitative Finance, 1(2), 237-245.
Engle, R.F., Lilien, D.M., & Robins, R.P. (1987). Estimating time varying risk premia in the term structure: The Arch–M model, Econometrica, 55(2), 391-407. doi. 10.2307/1913242
Erken, H. Hayat, R., Heijmerikx, M., Prins, C., & de Vreede, I.(2017). Assessing the Economic Impact of Brexit: Background Report. Rabobank, RaboResearch, [Retrieved from].
Fakhry, B. (2016). A literature review of the efficient market hypothesis. Turkish Economic Review, 3(3), 431-442.
Fakhry, B., & Richter, C. (2015). Is the sovereign debt market efficient? Evidence from the US and German sovereign debt markets. International Economics and Economic Policy, 12(3), 339-357. doi. 10.1007/s10368-014-0304-9
Fakhry, B., & Richter, C. (2016a). Testing the efficiency of the sovereign debt market using an asymmetrical volatility Test. Journal of Management and Training for Industries, 3(2), 1-15.
Fakhry, B., & Richter, C. (2016b). Testing the efficiency of the GIPS sovereign debt markets using an asymmetrical volatility Test. Journal of Economics and Political Economy, 3(3), 524-535.
Fakhry, B., & Richter, C. (2018). Does the federal constitutional court ruling mean the German financial market is efficient? European Journal of Business Science and Technology, 4(2), 111-125. doi. 10.11118/ejobsat.v4i2.120
Fakhry, B., Masood, O., & Bellalah, M. (2016). The efficiency of the GIPS sovereign debt markets during a crisis. International Journal of Business, 2(1), 87-98.
Fakhry, B., Masood, O., & Bellalah, M. (2017). Are the GIPS sovereign debt markets efficient during a crisis? Journal of Risk, 19(S1), S27-S39. doi. 10.21314/JOR.2017.373
Feldstein, M. S. (2009). Rethinking the role of fiscal policy. The American Economic Review: Papers & Proceedings, 99(2), 556-559. doi. 10.1257/aer.99.2.556
Gade, T., Salines, M., Glöckler, G., & Strodthoff, S. (2013). Loose lips sinking markets?: The impact of political communication on sovereign bond spreads. European Central Bank, Occasional Paper Series, No.150. [Retrieved from].
Gropp, R.E. (2016). IWH Press Release 24/2016. [Retrieved from].
Gudgin, G., Coutts, K., Gibson, N., & Buchanan, J. (2017). The role of gravity models in estimating the economic impact of Brexit. University of Cambridge, Centre for Business Research Working Paper, No.490. [Retrieved from].
Haan, W.D., Ellison, M., Ilzetzki, E., McMahon, M., & Reis, R. (2016). A Vote to Leave willIncrease Financial Market Volatility. LSE Research, [Retrieved from].
Hobolt, S.B. (2016). The Brexit vote: a divided nation, a divided continent. Journal of European Public Policy, 23(9), 1259-1277. doi. 10.1080/13501763.2016.1225785
Inglehart, R.F., & Norris, P. (2016). Trump, Brexit, and the Rise of Populism: Economic Have-Nots and Cultural Backlash. Harvard Kennedy School, HKS Faculty Research Working Paper Series, No.RWP16-026. [Retrieved from].
Kierzenkowski, R., Pain, N., Rusticelli, E., & Zwart, S. (2016). The Economic Consequences of Brexit: A Taxing Decision. OECD Economic, Policy Paper, No.16. [Retrieved from].
Lee, W.Y., Jang, C.X., & Indro, D.C. (2002). Stock market volatility, excess returns and the role of investor sentiment. Journal of Banking & Finance, 26(12), 2277-2299. doi. 10.1016/S0378-4266(01)00202-3
Masood, O. (2009). Balance sheet exposures leading toward the credit crunch in global investment banks. The Journal of Credit Risks, 5(2), 57-76
Metiu, N. (2011). The EMU in debt distress: Contagion in sovereign bond market. European Economic Association & Econometric Society 2011 Parallel Meetings, Oslo, 25-29 August.
Mohl, P., & Sondermann, D. (2013). Has political communication during the crisis impacted sovereign bond spreads in the euro area? Applied Economics Letters, 20(1), 48-61. doi. 10.1080/13504851.2012.674201
Niederjohn, S., Harrison, A., & Clark, J.R. (2017). The economics of Brexit. Social Education, 81(2), 84-87.
Pastor, L., & Stambaugh, R.F. (2012). Are stocks really less volatile in the long run?, The Journal of Finance, 67(2), 431-478. doi. 10.1111/j.1540-6261.2012.01722.x
Sampson, T. (2017). Brexit: The economics of international disintegration. Journal of Economic Perspectives, 31(4), 163-184. doi. 10.1257/jep.31.4.163
Shiller, R.J. (1979). The volatility of long-term interest rates and expectations models of the term structure. The Journal of Political Economy, 87(6), 1190-1219. doi. 10.1086/260832
Shiller, R.J. (1981). The use of volatility measures in assessing market efficiency. The Journal of Finance, 36(2), 291-304. doi. 10.1111/j.1540-6261.1981.tb00441.x
Smales, LA. (2017). 'Brexit': A case study in the relationship between political and financial market uncertainty. International Review of Finance, 17(3), 451-459. doi. 10.1111/irfi.12100
Taylor, J.B. (2008). The state of the economy and principles for fiscal stimulus. Testimony before the Committee on the Budget United States Senate, [Retrieved from].
Taylor, J.B. (2009). The financial crisis and the policy responses: An empirical analysis of what went wrong. NBER Working Paper, No.14631. doi. 10.3386/w14631
Zakoian, J.M. (1994). Threshold heteroskedastic models. Journal of Economic Dynamics and Controls, 18(5), 931-955. doi. 10.1016/0165-1889(94)90039-6
