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Brexit and Uncertainty in Financial Markets

Author

Listed:
  • Guglielmo Maria Caporale

    () (Department of Economics and Finance, Brunel University, London UB8 3PH, UK)

  • Luis Gil-Alana

    () (Department of Economics, University of Navarra, UB8 3PH Pamplona, Spain)

  • Tommaso Trani

    () (Department of Economics, University of Navarra, UB8 3PH Pamplona, Spain)

Abstract

This paper applies long-memory techniques (both parametric and semi-parametric) to examine whether Brexit has led to any significant changes in the degree of persistence of the FTSE (Financial Times Stock Index) 100 Implied Volatility Index (IVI) and of the British pound’s implied volatilities (IVs) vis-à-vis the main currencies traded in the FOREX (foreign exchange market), namely the euro, the US dollar and the Japanese yen. We split the sample to compare the stochastic properties of the series under investigation before and after the Brexit referendum, and find an increase in the degree of persistence in all cases except for the British pound-yen IV, whose persistence has declined after Brexit. These findings highlight the importance of completing swiftly the negotiations with the European Union (EU) to achieve an appropriate Brexit deal.

Suggested Citation

  • Guglielmo Maria Caporale & Luis Gil-Alana & Tommaso Trani, 2018. "Brexit and Uncertainty in Financial Markets," International Journal of Financial Studies, MDPI, Open Access Journal, vol. 6(1), pages 1-9, February.
  • Handle: RePEc:gam:jijfss:v:6:y:2018:i:1:p:21-:d:131390
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    References listed on IDEAS

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    1. Jeff Fleming & Barbara Ostdiek & Robert E. Whaley, 1995. "Predicting stock market volatility: A new measure," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 15(3), pages 265-302, May.
    2. Fernandes, Marcelo & Medeiros, Marcelo C. & Scharth, Marcel, 2014. "Modeling and predicting the CBOE market volatility index," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 1-10.
    3. Hui Guo & Robert F. Whitelaw, 2006. "Uncovering the Risk-Return Relation in the Stock Market," Journal of Finance, American Finance Association, vol. 61(3), pages 1433-1463, June.
    4. Koopman, Siem Jan & Jungbacker, Borus & Hol, Eugenie, 2005. "Forecasting daily variability of the S&P 100 stock index using historical, realised and implied volatility measurements," Journal of Empirical Finance, Elsevier, vol. 12(3), pages 445-475, June.
    5. Caporale, Guglielmo Maria & Gil-Alana, Luis & Plastun, Alex, 2018. "Is market fear persistent? A long-memory analysis," Finance Research Letters, Elsevier, vol. 27(C), pages 140-147.
    6. Fulvio Corsi, 2009. "A Simple Approximate Long-Memory Model of Realized Volatility," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 7(2), pages 174-196, Spring.
    7. Scott R. Baker & Nicholas Bloom & Steven J. Davis, 2016. "Measuring Economic Policy Uncertainty," The Quarterly Journal of Economics, Oxford University Press, vol. 131(4), pages 1593-1636.
    8. Luis A. Gil-Alana, 2008. "Fractional integration and structural breaks at unknown periods of time," Journal of Time Series Analysis, Wiley Blackwell, vol. 29(1), pages 163-185, January.
    9. Jushan Bai & Pierre Perron, 2003. "Computation and analysis of multiple structural change models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 18(1), pages 1-22.
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    Cited by:

    1. repec:kap:iecepo:v:16:y:2019:i:1:d:10.1007_s10368-018-00423-0 is not listed on IDEAS
    2. repec:kap:iecepo:v:16:y:2019:i:1:d:10.1007_s10368-018-00424-z is not listed on IDEAS

    More about this item

    Keywords

    Brexit; uncertainty; IVI index; British pound’s implied volatilities; financial markets;

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance
    • F2 - International Economics - - International Factor Movements and International Business
    • F3 - International Economics - - International Finance
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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