Abstract
An examination of Brexit and its initial impact on the main stock markets in the Greater China Region (GCR) was conducted using augmented market models that integrate Economic Policy Uncertainty (EPU) and implied volatility (VIX). The results do not seem to align with research in the field that has suggested that the EPU index helps to identify if market participants are reacting to political events. The main research findings suggest that Brexit does not appear to have an impact on the performance of market returns in the region and the influence of economic policy uncertainty in the GCR appears to be insignificant, except for Hong Kong. Overall, China’s stock markets do not seem to be panicking and overreacting to unfolding events in the UK, and market instability in the region appears to be more associated with global and regional events that are better captured by the VIX index.
Highlights
The year 2016 is described by Chen et al (2017) as the year of global black swan events
The variables considered as part of this research study include: (i) the Economic Policy Uncertainty (EPU) index for the UK developed by Baker et al (2012, 2014, 2016) that has been used in a variety of research papers mainly focused on the economic context because the EPU index is considered a good indicator of economic risk; (ii) The Volatility Index (VIX) is included to measure market risk in a global context; (iii) The main stock indices for the Greater China Region (GCR) are considered to help measure market instability after the British referendum on continued EU membership; (iv) The FTSE 100 is the proxy for systematic risk; and (v) the UK 3-month Treasury Bill is the risk-free rate
Afterwards, a vector autoregression (VAR) model was implemented to identify the appropriate number of lags that were needed to ensure that the model was properly specified and to avoid creating unnecessary problems regarding model specification due to the selection of an inappropriate number of lags
Summary
The year 2016 is described by Chen et al (2017) as the year of global black swan events. The main hypothesis explored in this study is to understand whether the UK’s decision to leave the EU has generated significant disruptions in the stock markets of the GCR, since stock markets are considered to be a barometer mirroring how early signs of global economic and financial distress can spillover towards the real economy. This paper seeks to offer evidence on how Brexit political uncertainty in the UK could have potential spillover effects on China’s main stock markets. Section five deals with the main findings and their analysis while section six concludes the study
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