Abstract

The 2016 Brexit referendum created potential turmoil in financial markets. The purpose of this study is to examine the impact of the Brexit referendum on the return and volatility spillover between the EU, the UK, and the USA stock markets and the Indian stock market during the pre- and post-Brexit referendum period. The VAR and bivariate GARCH BEKK models were employed. The study results suggest that before the Brexit referendum, Indian stock market returns made no significant return spillover on the other markets. On the contrary, following the referendum, Indian stock returns significantly spilled over to France, Germany, the UK, and the USA stock market returns. The study results also identified a substantial increase in the bidirectional volatility spillover between India-France, India-UK, and India-USA during the post-Brexit referendum period. Therefore, the investors’ opportunity to invest simultaneously in India, UK, EU, and US stock markets for portfolio diversification is limited. India was affected mainly by its own past shocks before the Brexit referendum. However, after the Brexit referendum, Indian markets are getting more and more integrated with other markets. In order to reap the diversification benefits, a prudent investment strategy will need to be developed in the future, especially during times of economic and political uncertainty and market crisis.

Highlights

  • In 2016, UK’s summer was marked by significant political and economic turbulence

  • The purpose of this study is to examine the impact of the Brexit referendum on the return and volatility spillover between the EU, the UK, and the USA stock markets and the Indian stock market during the pre- and post-Brexit referendum period

  • This study aims to investigate the spillover of return and volatility between the stock markets of India and four countries, namely France, Germany, the UK, and the USA, and compare market interactions before and after the Brexit referendum using the VAR model and the bivariate GARCH BEKK model

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Summary

INTRODUCTION

In 2016, UK’s summer was marked by significant political and economic turbulence. On June 23, 2016, the United Kingdom’s European Union membership referendum, known as the Brexit referendum, was held. Previous studies confirmed that Brexit fected by their own spillovers (Heatwave hypothoutcome caused financial contagion as a result of esis) and cross-market spillover (Meteor shower shock and spillover of volatility among European hypothesis). These phenomena can be studied usmarkets would continue to persist To the authors’ knowledge, the earlier research el to investigate the likeliness of return spillover has not examined the impact of the Brexit ref- over a period and among different markets This erendum on the volatilities of European stock model evaluates the sign and the strength of the markets like Germany and France, UK, and US cross-correlation among the returns of different stock markets on the Indian stock market using markets (Hung, 2019).

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