Did Brexit change asset co-movements?

Shrabani Saha, Anindya Sen, Christine Smith-Han and Dennis Wesselbaum

Journal of Financial Economic Policy, 2021, vol. 14, issue 1, 43-55

Abstract: Purpose - This paper aims to examine the impact of the Brexit referendum on the risk structure of financial asset prices. Co-movements are analysed using daily price returns of major stock and bond indices as well as commodities and exchange rates from June 2014 to June 2018. The authors used a multivariate GARCH model to study the dynamics of the conditional correlation matrix of asset returns. It was found that the conditional variances and correlations of assets spike on and after the Brexit referendum and then quickly revert to normal levels, suggesting that the effect of the referendum was transient rather than structural. The findings are of interest to investors as co-movements of financial assets can significantly impact financial portfolios and hedging strategies. Design/methodology/approach - The authors used a multivariate GARCH model to study the dynamics of the conditional correlation matrix of asset returns. Findings - It was found that the conditional variances and correlations of assets spike on and after the Brexit referendum and then quickly revert to normal levels, suggesting that the effect of the referendum was transient rather than structural. Research limitations/implications - The findings are of interest to investors as co-movements of financial assets can significantly impact financial portfolios and hedging strategies. Originality/value - To the best of the authors’ knowledge, research studying the underlying asset co-movements around Brexit does not exist.

Keywords: Brexit; Dynamic conditional correlations; Financial markets; Financing policy; Event studies; G14; G15; G32 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jfeppp:jfep-07-2020-0152

DOI: 10.1108/JFEP-07-2020-0152

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