Impact of Brexit on bond yields and volatility spillover across France, Germany, UK, USA, and India’s debt markets
-
Author(s)Sangeetha G NagarakatteLink to ORCID Index: https://orcid.org/0000-0002-9211-1802
,
Natchimuthu NatchimuthuLink to ORCID Index: https://orcid.org/0000-0002-2461-7801
-
DOIhttp://dx.doi.org/10.21511/imfi.19(3).2022.16
-
Article InfoVolume 19 2022, Issue #3, pp. 189-202
- Cited by
- 520 Views
-
178 Downloads
This work is licensed under a
Creative Commons Attribution 4.0 International License
Britain’s decision to exit the EU lead to disruptions in global markets. This study investigates the change in the return and volatility spillover pattern due to the repercussions of the Brexit vote between the US, France, the UK, Germany, and India’s 10-year government bond yields by applying the VAR and GARCH-BEKK models. The findings demonstrate a substantial rise in the return spillover to India and USA 10-year government bond yields following the Brexit vote compared to the pre-Brexit vote era. In addition, the results showed evidence of unidirectional volatility spillover from India to France, bidirectional volatility spillover between the USA and India, and unidirectional volatility spillover from the UK to India 10-year government bond market post-Brexit vote. However, there was no interconnection between these markets before the Brexit vote. Therefore, the Brexit vote did affect and significantly increased the linkage between the US, France, the UK, and India’s 10-year government bond market. The increase in correlation in India-US, India-UK, and India-France’s 10-year government bond markets will help predict and have an important implication for hedgers, decision-makers, and portfolio managers if similar political events occur in the future.
- Keywords
-
JEL Classification (Paper profile tab)G11, G15
-
References65
-
Tables5
-
Figures2
-
- Figure 1. Pre-Brexit vote era bond yield
- Figure 2. Post-Brexit vote era bond yield
-
- Table 1. Descriptive statistics of 10-year government bond yields at first difference
- Table 2. Correlation matrix between bond yields at first difference
- Table 3. VAR parameters for the pre-Brexit vote era
- Table 4. VAR parameters for the post-Brexit vote era
- Table 5. Estimation of bivariate GARCH-BEKK model parameters
-
- Abuzayed, B., Al-Fayoumi, N., & Bouri, E. (2022). Hedging UK stock portfolios with gold and oil: The impact of Brexit. Resources Policy, 75, 102434.
- Adesina, T. (2017). Estimating volatility persistence under a Brexit-vote structural break. Finance Research Letters, 23, 65-68.
- Agur, I., Chan, M., Goswami, M., & Sharma, S. (2019). On international integration of emerging sovereign bond markets. Emerging Markets Review, 38, 347-363.
- Aristeidis, S., & Elias, K. (2018). Empirical analysis of market reactions to the UK’s referendum results – How strong will Brexit be? Journal of International Financial Markets, Institutions and Money, 53, 263-286.
- Bekaert, G., Ehrmann, M., Fratzscher, M., & Mehl, A. (2014). The Global Crisis and Equity Market Contagion. Journal of Finance, 69(6), 2597-2649.
- Belke, A., Dubova, I., & Osowski, T. (2018). Policy uncertainty and international financial markets: the case of Brexit. Applied Economics, 50(34-35), 3752-3770.
- BenSaïda, A., Litimi, H., & Abdallah, O. (2018). Volatility spillover shifts in global financial markets. Economic Modelling, 73, 343-353.
- Bhar, R., & Nikolova, B. (2009). Return, volatility spillovers and dynamic correlation in the BRIC equity markets: An analysis using a bivariate EGARCH framework. Global Finance Journal, 19(3), 203-218.
- Bhattacharyay, B. N. (2013). Determinants of bond market development in Asia. Journal of Asian Economics, 24, 124-137.
- Bloom, N. (2009). The Impact of Uncertainty Shocks. Econometrica, 77(3), 623-685.
- Bollerslev, T., & Wooldridge, J. (1992). Quasi-maximum likelihood estimation and inference in dynamic models with time-varying covariances. Econometric Reviews, 11(2), 143-172.
- Breinlich, H., Leromain, E., Novy, D., Sampson, T., & Usman, A. (2018). The Economic Effects of Brexit: Evidence from the Stock Market. Fiscal Studies, 39(4), 581-623.
- Burdekin, R. C. K., Hughson, E., & Gu, J. (2018). A first look at Brexit and global equity markets. Applied Economics Letters, 25(2), 136-140.
- Chaudhuri, P. P. (2020). Brexit and India-UK Relations. In R. A. Jain (Ed.), India and the European Union in a Turbulent World (pp. 91-107). Singapore: Palgrave Macmillan.
- Chiang, S.-M., Chen, H.-F., & Lin, C.-T. (2013). The spillover effects of the sub-prime mortgage crisis and optimum asset allocation in the BRICV stock markets. Global Finance Journal, 24(1), 30-43.
- Christiansen, C. (2007). Volatility-spillover effects in European bond markets. European Financial Management, 13(5), 923-948.
- Christiansen, C. (2014). Integration of European bond markets. Journal of Banking & Finance, 42(1), 191-198.
- Cumming, D. J., & Zahra, S. A. (2016). International Business and Entrepreneurship Implications of Brexit. British Journal of Management, 27(4), 687-692.
- Dao, T. M., McGroarty, F., & Urquhart, A. (2019). The Brexit vote and currency markets. Journal of International Financial Markets, Institutions and Money, 59, 153-164.
- 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.
- Diebold, F. X., & Yilmaz, K. (2012). Better to give than to receive: Predictive directional measurement of volatility spillovers. International Journal of Forecasting, 28(1), 57-66.
- Driffield, N., & Karoglou, M. (2019). Brexit and foreign investment in the UK. Journal of the Royal Statistical Society. Series A: Statistics in Society, 182(2), 559-582.
- Dugal, I., & Sonavane, R. (2016, July 28). India’s 10-year bond yield nears 2009 lows. Mint Delhi.
- Engle, R. F., & Kroner, K. F. (1995). Multivariate Simultaneous Generalized ARCH. Econometric Theory, 11(1), 122-150.
- Engle, R. F., Ito, T., & Lin, W.-L. (1990). Meteor Showers or Heat Waves ? Heteroskedastic Intra-Daily Volatility in the Foreign Exchange Market. Econometrica, 58(3), 525-542.
- Felman, J., Gray, S., Goswami, M., Jobst, A. A., Pradhan, M., Peiris, S., & Seneviratne, D. (2014). ASEAN-5 bond market development: Where does it stand? Where is it going? Asian-Pacific Economic Literature, 28(1), 60-75.
- Forbes, K. J., & Rigobon, R. (2002). No contagion, only interdependence: Measuring stock market comovements. The Journal of Finance, 57(5), 2223-2261.
- Geddie, J. (2016, June 17). UPDATE 3-Euro zone bond markets steady as Brexit chances seen receding. Reuters.
- Gopinath, T. (2008). Does Subprime Mortgage Crisis in the US Impact India?: An Exploration. The Indian Economic Journal, 56(3), 159-180.
- Gu, C., & Hibbert, A. M. (2021). Expectations and financial markets: Lessons from Brexit. The Financial Review, 56(2), 279-299.
- Guedes, E. F., Ferreira, P., Dionísio, A., & Zebende, G. F. (2019). An econophysics approach to study the effect of BREXIT referendum on European Union stock markets. Physica A: Statistical Mechanics and Its Applications, 523, 1175-1182.
- Hosoe, N. (2018). Impact of border barriers, returning migrants, and trade diversion in Brexit: Firm exit and loss of variety. Economic Modelling, 69, 193-204.
- Hui, E. C. M., & Chan, K. K. K. (2021). New test of contagion with application on the Brexit referendum. Physica A: Statistical Mechanics and Its Applications, 564, 125474.
- Hung, N. T. (2019). Return and volatility spillover across equity markets between China and Southeast Asian countries. Journal of Economics, Finance and Administrative Science, 24(47), 66-81.
- Hung, N. T. (2020). An analysis of CEE equity market integration and their volatility spillover effects. European Journal of Management and Business Economics, 29(1), 23-40.
- Inaba, K. I. (2021). An empirical illustration of the integration of sovereign bond markets. Journal of Multinational Financial Management, 61, 100674.
- Jawad, M., & Naz, M. (2019). Pre and post effects of Brexit polling on United Kingdom economy: an econometrics analysis of transactional change. Quality & Quantity, 53(1), 247-267.
- Kara, A., Karimov, N., & Nguyen, A. P. (2021). Brexit referendum and the UK securitization market. Applied Economics Letters, 28(13), 1092-1097.
- Kim, S., & Lee, J. W. (2012). Real and Financial Integration in East Asia. Review of International Economics, 20(2), 332-349.
- Li, H. (2020). Volatility spillovers across European stock markets under the uncertainty of Brexit. Economic Modelling, 84, 1-12.
- Majdoub, J., & Mansour, W. (2014). Islamic equity market integration and volatility spillover between emerging and US stock markets. North American Journal of Economics and Finance, 29, 452-470.
- McCormick, L., & Regan, M. P. (2021, March 17). Why 10-Year Treasury Yields Get All the Attention. Bloomberg.
- Mohammadi, H., & Tan, Y. (2015). Return and volatility spillovers across equity markets in Mainland China, Hong Kong and the United States. Econometrics, 3(2), 215-232.
- Park, C. Y., & Lee, J. W. (2011). Financial integration in emerging Asia: Challenges and prospects. Asian Economic Policy Review, 6(2), 176-198.
- Plummer, M. G., & Click, R. W. (2005). Bond market development and integration in ASEAN. International Journal of Finance and Economics, 10(2), 133-142.
- Ramiah, V., Pham, H. N. A., & Moosa, I. (2017). The sectoral effects of Brexit on the British economy: early evidence from the reaction of the stock market. Applied Economics, 49(26), 2508-2514.
- Ranasinghe, D. (2019, September 27). French, Spanish 10-year bond yields set for biggest weekly fall in six weeks. Reuters.
- Rebello, J. (2020, March 4). Why India’s 10-year bond yield stays high. The Economic Times.
- Reuters. (2016, June 14). Germany’s 10-year government bond yield falls to 0% for first time as Brexit worries mount. Financial Express.
- Ribeiro, P. P., Cermeño, R., & Curto, J. D. (2017). Sovereign bond markets and financial volatility dynamics: Panel-GARCH evidence for six euro area countries. Finance Research Letters, 21, 107-114.
- Rigobon, R. (2016). Contagion, spillover and interdependence (Working Paper No. 1975). European Central Bank.
- Roy, A., & Mathur, S. K. (2016). Brexit and India–EU Free Trade Agreement. Journal of Economic Integration, 31(4), 740-773.
- Rughoo, A., & You, K. (2016). Asian financial integration: Global or regional? Evidence from money and bond markets. International Review of Financial Analysis, 48, 419-434.
- Samitas, A., Polyzos, S., & Siriopoulos, C. (2018). Brexit and financial stability: An agent-based simulation. Economic Modelling, 69, 181-192.
- Šimović, P. P., Tkalec, M., Vizek, M., & Lee, J. (2016). Time-varying integration of the sovereign bond markets in European post-transition economies. Journal of Empirical Finance, 36, 30-40.
- Srovnalikova, P., & Razinskaite, J. (2017). The Eurozone Crisis and the Effect of Brexit. Vadyba Journal of Management, 30(1), 95-102.
- Stoupos, N., & Kiohos, A. (2021). BREXIT referendum’s impact on the financial markets in the UK. Review of World Economics, 157(1), 1-19.
- Tripathi, D. (2021). Evaluating Brexit Implications for India’s Relations with the EU and the UK. International Studies, 58(2), 234-247.
- Tsang, A., Yiu, M. S., & Nguyen, H. T. (2021). Spillover across sovereign bond markets between the US and ASEAN4 economies. Journal of Asian Economics, 76, 101343.
- Tsukuda, Y., Shimada, J., & Miyakoshi, T. (2017). Bond market integration in East Asia: Multivariate GARCH with dynamic conditional correlations approach. International Review of Economics and Finance, 51, 193-213.
- Vo, X. V. (2009). International financial integration in Asian bond markets. Research in International Business and Finance, 23(1), 90-106.
- Vo, X. V., & Ellis, C. (2018). International Financial Integration: Stock Return Linkage and Volatility Transmission between Vietnam and Other Advanced Countries. Emerging Markets Review, 36, 19-27.
- Wagenvoort, R. J. L. M., Ebner, A., & Borys, M. M. (2011). A factor analysis approach to measuring European loan and bond market integration. Journal of Banking & Finance, 35(4), 1011-1025.
- Wang, Z., Yan, Y., & Chen, X. (2017). Long-range correlation and market segmentation in bond market. Physica A: Statistical Mechanics and Its Applications, 482, 477-485.
- Whitehouse, M. (2016). The Bond Market Still Thinks Brexit Is Bad. Bloomberg.
-
The impact of United States monetary policy uncertainty on the Gulf Cooperation Council stock markets
Investment Management and Financial Innovations Volume 16, 2019 Issue #1 pp. 128-143 Views: 1922 Downloads: 120 TO CITE АНОТАЦІЯMost of the GCC countries currencies are pegged to the US dollar, which make the economy those countries susceptible to the US monetary policy change. This paper used the non-structural VAR tests to examine the spillovers impact of the two recently developed US monetary policy uncertainty indices (the BBD MPU and the HRS MPU) shocks on GCC stock markets from 2003: M01 to 2017: M07. The result revealed that during the period under review, the two MPU have slight significant impact on some GCC markets. But the HRS MPU has more impact than the BBD MPU. Besides this, unidirectional causality running from HRS MPU to Bahraini and Kuwaiti Stock market was detected within the period. Hence, policymakers should realize the heterogeneity impacts from US MPU to stock markets in GCC countries. The findings also help investors and portfolio managers to better understand the effects of US monetary policy uncertainty on the stock markets.
-
The effectiveness of exchange rate channel in Azerbaijan: an empirical analysis
Shahriyar Mukhtarov , Serhat Yüksel 
,
Elvsevar Ibadov ,
Hamid Hamidov
doi: http://dx.doi.org/10.21511/bbs.14(1).2019.10
Banks and Bank Systems Volume 14, 2019 Issue #1 pp. 111-121 Views: 1921 Downloads: 311 TO CITE АНОТАЦІЯThe main purpose of this study is to make an analysis to understand whether the exchange rate channel is effective in Azerbaijan. In this framework, quarterly data between 2001:01 and 2017:02 is examined in this study. Furthermore, VAR method is taken into the consideration in the analysis process. The findings show that exchange rate channel is very important for Azerbaijani economy. In other words, the exchange rate channel is working on the total output and price axis. Hence, it is recommended that necessary actions should be taken by a central bank regarding the effective usage of exchange rate channel to contribute to industrial production and employment.
-
An empirical study of the real effective exchange rate and foreign direct investment in Vietnam
Tram Thi Xuan Huong ,
My-Linh Thi Nguyen ,
Nguyen Thi Kim Lien
doi: http://dx.doi.org/10.21511/imfi.17(4).2020.01
Investment Management and Financial Innovations Volume 17, 2020 Issue #4 pp. 1-13 Views: 1339 Downloads: 639 TO CITE АНОТАЦІЯForeign direct investment (FDI) inflows to Vietnam have increased significantly in recent years. Theoretically, capital inflows will put pressure on the overvaluation of local currencies in countries, despite different exchange rate mechanisms. So, the problem facing the Vietnamese government is the need to examine the relationship between the exchange rate and FDI in order to develop effective policies. This study examined the relationship between the exchange rate and FDI in Vietnam in the period of 2005–2019 using the VAR (vector autoregression) model based on quarterly frequency data. The new points of this study are: (i) using the real effective exchange rate (REER) of the Vietnamese currency with 143 major trading partners of Vietnam; and (ii) adding two control variables into the VAR model to examine the relationship between the exchange rate and FDI in Vietnam – a case study for developing countries. The findings show that, firstly, there is a positive causal relationship between FDI and Vietnam’s real effective exchange rate. Secondly, trade openness has a positive impact on FDI and REER in Vietnam. Thirdly, economic growth has an impact on REER, but no statistically significant impact on FDI was found. The findings can provide useful information to help policymakers plan and make decisions on future policies and support further research studies.
