Abstract
Using event-study techniques, we investigate the impact of Brexit-related events on the corporate bond yield spreads in the United Kingdom and Eurozone, respectively. We want to find out whether Brexit-related news, including the Brexit referendum itself, had an impact on the risk conditions in those two corporate bond markets. Our estimation results indicate that the announcement of the referendum result is associated with increasing credit spreads in the UK and EA. However, only the actual announcement of the UK referendum result itself had an influence on the credit spreads. Furthermore, we distinguish between the financial and the non-financial economic sectors in order to analyze more specific sector-related effects of the referendum event. Our estimation results suggest that UK credit spreads were more strongly influenced by the announcement of the results of the Brexit referendum than credit bond spreads in the Eurozone were. Finally, we split our sample into pre-referendum and post-referendum periods to consider the potential changing evaluation of the determinants of corporate bond spreads due to altering risk pricing triggered by the Brexit referendum result. We find that the effect of credit default risk is far stronger and plays a significant role in the post-referendum period in UK and EA, respectively.
Highlights
Brexit represents a major institutional and political change for the United Kingdom and the EU27/Eurozone and could change the perception of risk with regard to both UK and Eurozone bonds
Our results indicate that the impact of Brexit on credit spreads for a given maturity is higher for financials than for non-financials, especially in the euro area (EA) where corporate bond spreads in the non-financial sector were hardly or not at all affected by the referendum result
Policymakers and financial economists alike are concerned about the impact of Brexit on future economic developments in the UK and EU27 member countries, respectively
Summary
Brexit represents a major institutional and political change for the United Kingdom and the EU27/Eurozone and could change the perception of risk with regard to both UK and Eurozone bonds. Our paper is related to the literature which focuses on the short-term effects of Brexit on financial markets These studies elaborate on the impact of Brexit on stock markets, exchange rates, and interest rates. Belke et al (2016) elaborate on the impact of Brexit on long-term interest rates Their empirical results suggest that an increase in the Brexit probability decreased 10-year government bond yields in the UK and in risk-free countries, respectively. We find that the impact of determining variables on corporate bond yield spreads in the UK and EA is not constant over time and that the effect of credit default risk is far stronger and plays a significant role in the post-referendum period in UK and EA, respectively.
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
