Abstract
In this paper, we analyse the response of Japan’s foreign exchange and stock markets to the outcomes of the Brexit referendum and the U.S. presidential election. We estimate the changes in returns of the daily exchange rates of the yen (JPY), the daily closing price index of the Nikkei and the dynamic conditional correlation (DCC) coefficients between the JPY and the Nikkei caused by both events. The empirical findings showed a significant change in the daily logarithmic returns of exchange rates of the JPY and the closing price index of the Nikkei, as well as their time-varying comovement (DCC) after both events. In general, the impact of the U.S. elections on financial markets and their dynamic correlation was stronger than the impact of the Brexit referendum.
Highlights
The Brexit referendum and the U.S presidential election were two very important events of 2016, both with unanticipated outcomes
We estimate the changes in returns of the daily exchange rates of the yen (JPY), the daily closing price index of the Nikkei and the dynamic conditional correlation (DCC) coefficients between the JPY and the Nikkei caused by both events
The difference in the logarithmic daily representative exchange rate of the JPY and the closing price index of the Nikkei are used in estimation
Summary
The Brexit referendum and the U.S presidential election were two very important events of 2016, both with unanticipated outcomes. Stock and foreign exchange markets in different countries showed large volatility as soon as the news of the results of the referendum and election unfolded. We analyse the response of Japan’s foreign exchange and stock markets to the outcomes of the Brexit referendum and the U.S presidential election. Bollerslev’s generalised autoregressive conditionally heteroskedastic (GARCH) model (Bollerslev 1986)—a natural generalisation of the autoregressive conditional heteroskedastic process introduced in (Engle 1982)—is an appropriate and widely used tool for analysing time-varying interdependence between financial markets. Different types of GARCH models have been used to analyse the dynamic interdependence of financial markets and the impact of a variety of factors on financial markets and their comovements. The impact of international economic changes and financial crises (Karfakis and Panagiotidis 2015; Chung and Jang 2000; Agren 2006), political changes and conflicts (Lin and Wang 2005; Hanabusa 2010), and natural disasters (Hanabusa 2010; Wang and Kutan 2013) on the financial markets of Japan have been studied
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