Does the Brexit Referendum Affect the Integration between the UK and other European Countries? Evidence from the Sovereign Bond Market

Abstract

This paper investigates the impacts of the Brexit referendum on equilibrium relationships and spillover effects between the UK and other European countries’ sovereign bond markets. We run vector error correction model (VECM) with dummy variables to detect the shifts in the long-run equilibriums and short-run error correction mechanisms around the Brexit referendum. We then use spillover analysis proposed by Diebold and Yilmaz (2009) to examine static and dynamic spillover effects between the UK and the (non-) Eurozone. The empirical results suggest that there exists significant shift in the integration between the UK and other EU countries’ sovereign bond markets during different periods. Moreover, the integration and spillover effects became stronger after the Brexit referendum on 23 June 2016.