Abstract
In this paper, we study the cross-market effects of Brexit on the stock and bond markets of nine major countries in the world. By incorporating information theory, we introduce the time-varying impact weights based on symbolic transfer entropy to improve the traditional GARCH model. The empirical results show that under the influence of Brexit, flight-to-quality not only commonly occurs between the stocks and bonds of each country but also simultaneously occurs among different countries. We also find that the accuracy of the time-varying symbolic transfer entropy GARCH model proposed in this paper has been improved compared to the traditional GARCH model, which indicates that it has a certain practical application value.
Highlights
Investors often hold multiple assets to effectively reduce the risk of loss during a financial crisis
It is typically believed that crossmarket flight is induced when the prices of certain assets increase during a financial crisis, this phenomenon often occurs between the stock and bond markets in crisis periods
The data consist of the main daily stock indices of the United States and Canada in North America; China and Japan in Asia; Germany, Britain, France and Italy with the top 4 GDP rankings in the EU member states; and Australia in Oceania: Standard & Poor’s 500 index, Nikkei 225 index, German DAX index, France CAC40 index, FTSE-100 index, Italian index, Shanghai composite index, Australian Standard & Poor’s 200 index and Toronto 300 index
Summary
Investors often hold multiple assets to effectively reduce the risk of loss during a financial crisis. By incorporating information theory, we construct the improved GARCH model based on the time-varying symbolic transfer entropy to conduct research on the cross-market risk contagion and flights in the stocks and bonds of 9 major global economies caused by Brexit.
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