Policy uncertainty and international financial markets: the case of Brexit

Ansgar Belke, Irina Dubova and Thomas Osowski

No 201607, ROME Working Papers from ROME Network

Abstract: This study assesses the impact of Brexit uncertainty on the UK and also on international financial markets, for the first and the second statistical moments. As financial markets are highly linked in general and several countries apart from the UK might be negatively affected, one may expect that the (uncertainty about) Brexit does not only have an impact on financial markets in Britain. By analyzing the impact of Brexit on financial markets, we might also get some insights about market’s expectations about the magnitude of the economic impact beyond the UK and which country beyond the UK may be mostly affected. For this purpose, we firstly use the Diebold and Yilmaz (2012) and the Hafner and Herwartz (2008) method to estimate the time-varying interactions between UK policy uncertainty, which to a large extent is attributed to Brexit uncertainty, and UK financial market volatilities (second statistical moment) and try to identify the direction of causality among them. Secondly, we use two other measures of the perceived probability of a Brexit, namely daily data released by Betfair as well as results of polls published by Bloomberg. Based on these datasets and using both panel as well as single-country SUR estimation methods, we analyse the Brexit effect on the levels of stock returns, sovereign CDS, ten-year interest rates of 19 different countries predominantly from Europe as well as of the British pound and of the euro (first statistical moment). We show that Brexit-caused policy uncertainty will continuously cause instability in key financial markets and has the potential to do damage to the UK’s and other European countries’ real economy, even in the medium run. The main losers outside of the UK are the GIIPS economies.

Keywords: Brexit; causality tests; financial instability; Pound sterling; uncertainty; spillovers (search for similar items in EconPapers)
JEL-codes: C58 D81 E44 F36 G15 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2016-07
New Economics Papers: this item is included in nep-eec and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Related works:
Working Paper: Policy Uncertainty and International Financial Markets: The case of Brexit (2016)
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