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Brexit and CDS spillovers across UK and Europe

Author

Listed:
  • Jamal Bouoiyour

    (CATT - Centre d'Analyse Théorique et de Traitement des données économiques - UPPA - Université de Pau et des Pays de l'Adour)

  • Refk Selmi

    (CATT - Centre d'Analyse Théorique et de Traitement des données économiques - UPPA - Université de Pau et des Pays de l'Adour, IRMAPE - Institut de Recherche en Management et Pays Emergents - ESC Pau)

Abstract

The purpose of the paper is twofold. First, it aims at identifying when UK and European (France, Germany, Italy and Spain) Credit Default Swaps (CDSs) exhibit explosivity with respect to their past behaviors. Second, it seeks to quantify the dynamics of CDS volatility spillover effects surrounding the UK's EU membership referendum commonly known as "Brexit". Using a recursive identification algorithm and new spillover measures suggested by Diebold and Yilmaz (2012), two interesting findings were drawn. We detect significant build-ups in CDS prices for all countries under study soon after the day relative to the announcement of Brexit. In addition, we show that the great uncertainty over Brexit generates significant risk spillovers across the underlined CDS. In particular, we find that UK, Italy and Spain are the "net volatility transmitters", while France and Germany seem the "net volatility receivers". Our findings may help in formulating appropriate regulatory policies and designing effective hedging strategies.

Suggested Citation

  • Jamal Bouoiyour & Refk Selmi, 2019. "Brexit and CDS spillovers across UK and Europe," Post-Print hal-01736525, HAL.
  • Handle: RePEc:hal:journl:hal-01736525
    DOI: 10.25428/1824-2979/201901-105-124
    Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-01736525
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    Keywords

    Credit Default Swaps; Explosivity; UK; Europe; Brexit; spillover effects; Volatility;
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