Brexit and the dependence structure among the G7 bank equity markets

Ramzi Nekhili,Kostas Giannopoulos

doi:10.21511/imfi.17(2).2020.18

Ramzi Nekhili, Kostas Giannopoulos

Open Access

https://doi.org/10.21511/imfi.17(2).2020.18

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Abstract

The UK referendum in June 2016 on leaving the European Union had a negative impact on banking stocks across the major financial markets. This has left with a question dealing with the effect of UK banking institutions on the systemic risk on a global scale. This paper aims at investigating the changes in the dependence structure between the UK bank equity returns and its counterparts in the G7 economies. The methodology used is based on the GJR-GARCH volatility spillover model that accounts for asymmetry and leverage, and copula for the time-varying correlation structure among G7 banks. Taking the data on bank equity return indices for G7 economies, the results indicate the symmetric dependence structure between the UK and Italian banks and the asymmetric dependence between the UK and the rest of G7 banks. This is due to the simultaneous decline in bank shares prices across the Union. Such results are important constituents for cross-country portfolio diversification.

Highlights

Since becoming a Member of the European Community ( European Union) in 1973, GDP in the UK has grown to an aggregate of 81.4%
This paper aims at investigating the changes in the dependence structure between the UK bank equity returns and its counterparts in the G7 economies
Time-varying copula models are used to verify the changes in the dependence structure, mainly in tail dependence, as they offer important advantages in the analysis of co-movements of financial time series over other techniques

Summary

Introduction

Since becoming a Member of the European Community ( European Union) in 1973, GDP in the UK has grown to an aggregate of 81.4%. Kierzenkowski, Pain, Rusticelli, and Zwart (2016) argued that the real GDP of the UK since joining the European Community in 1973, and until 2014, has doubled, outpacing other large non-EU economies like the USA, Canada, Australia. The UK exodus from the European Union is expected to have large negative implications in the economy. The sterling depreciation continued the days and the weeks after the referendum, reaching a low of 1.22, 1.08, and 127 against the US Dollar, Euro, and Yen. the sterling FX rate oscillated between these low and higher rates but far from the ones in the aftermath of the referendum, reflecting the market’s assessment of the likelihood of a hard or a soft Brexit

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