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Policy Uncertainty and International Financial Markets: The case of Brexit

Author

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  • Belke, Ansgar
  • Dubova, Irina
  • Osowski, Thomas

Abstract

By analysing this impact of the uncertainty caused by Brexit on both the UK and international financial markets, this team of distinguished economists aims to gain some insight into market expectations about the magnitude of the economic impact beyond the UK and which other countries might be affected. This study assesses the impact of the uncertainty caused by Brexit on both the UK and international financial markets, for the first and second statistical moments (i.e. on the changes and standard deviations of the respective variables). Since financial markets are by their nature highly interlinked, the uncertainty engendered by Brexit is also likely to have an impact on financial markets in several other countries. The authors first use both the Diebold and Yilmaz (2012) and the Hafner and Herwartz (2008) method to estimate the time-varying interactions between UK policy uncertainty, which is largely is attributed to uncertainty about Brexit, and UK financial market volatilities (second statistical moment) to try and identify the direction of causality among them. Second, they use two other measures of the perceived probability of Brexit before the referendum, namely daily data released by Betfair and results of polls published by Bloomberg. Based on these datasets, and using both panel and single-country SUR (seemingly unrelated regressions) estimation methods, the authors analyse the Brexit effect on levels of stock returns, sovereign credit default swaps (CDS), 10-year interest rates in 19 predominantly European countries, and those of the British pound and the euro (first statistical moment). They show that Brexit-induced policy uncertainty will continue to cause instability in key financial markets and has the potential to damage the real economy in both the UK and other European countries, even in the medium run. The main losers outside the UK are the ‘GIIPS’ economies: Greece, Ireland, Italy, Portugal and Spain.

Suggested Citation

  • Belke, Ansgar & Dubova, Irina & Osowski, Thomas, 2016. "Policy Uncertainty and International Financial Markets: The case of Brexit," CEPS Papers 12021, Centre for European Policy Studies.
  • Handle: RePEc:eps:cepswp:12021
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    References listed on IDEAS

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    1. FrancisX. Diebold & Kamil Yilmaz, 2009. "Measuring Financial Asset Return and Volatility Spillovers, with Application to Global Equity Markets," Economic Journal, Royal Economic Society, vol. 119(534), pages 158-171, January.
    2. Stefano d'Addona & Ilaria Musumeci, 2013. "The British opt-out from the European Monetary Union: empirical evidence from monetary policy rules," Applied Financial Economics, Taylor & Francis Journals, vol. 23(23), pages 1783-1795, December.
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    Cited by:

    1. repec:eee:riibaf:v:46:y:2018:i:c:p:516-527 is not listed on IDEAS
    2. Caporale, Guglielmo Maria & Spagnolo, Fabio & Spagnolo, Nicola, 2018. "Exchange rates and macro news in emerging markets," Research in International Business and Finance, Elsevier, vol. 46(C), pages 516-527.
    3. repec:zbw:rwikon:171736 is not listed on IDEAS
    4. repec:kap:iecepo:v:16:y:2019:i:1:d:10.1007_s10368-018-00424-z is not listed on IDEAS
    5. Thiem, Christopher, 2018. "Cross-category, trans-Pacific spillovers of policy uncertainty and financial market volatility," Ruhr Economic Papers 782, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.

    More about this item

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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