Abstract
Contemporary Europe needs to make important collective economic and foreign-policy decisions. Many authors argue that uncertainty has influence on the markets’ behavior. Therefore, we have decided to analyze the impact of the uncertainty on the returns and the volatility of two major European market indices Germany (DAX) and the U.K. (FTSE 100) across selected quantiles. We present results for the time-period from January 3, 2000 to December 30, 2016. As influential factors, we consider the Economic policy uncertainty (EPU) indices for Europe, the United Kingdom, Brexit and low prices of the crude oil. In our paper, we have found an asymmetric dependence of the analyzed market indices on the selected factors. EPU Brexit had no or weak impact on the analyzed data. Our conclusion shows to investors how sensitive German and English markets are to the uncertainty in Europe.
Highlights
Policy uncertainty in Europe has intensified because of the Global Financial Crisis, serial crises in the Eurozone, Brexit, etc
Our paper has analyzed the impact of economic uncertainty and selected volatilities on the German and U.K. stock markets across selected quantiles of the return distributions
Empirical results presented in this paper indicate an asymmetric dependence between the EU stock markets and all considered influential factors for the period from January 2000 to December 2016
Summary
Policy uncertainty in Europe has intensified because of the Global Financial Crisis, serial crises in the Eurozone, Brexit, etc. Bloomberg gives us an opportunity to analyze economic policy uncertainty for Europe, the United Kingdom and for Brexit in indices EPUCCEUM, EPUCUK, and EPUCBREX. The construction of these indices is based on newspaper articles regarding policy uncertainty concerning economy, uncertainty and information on spending, deficit, regulation, budget, tax, policy, or the Bank of England, or the ECB. We have taken EPU indices as risk factors for analyzing two major European markets – the DAX, Germany market and the FTSE 100, UK market. We propose a new model based on quantitative regression approach to explore how the individual mentioned risk factors affect the returns and volatility of the market index DAX and the FTSE 100.
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