Did Brexit change asset co-movements?

Abstract

Purpose This paper aims to examine the impact of the Brexit referendum on the risk structure of financial asset prices. Co-movements are analysed using daily price returns of major stock and bond indices as well as commodities and exchange rates from June 2014 to June 2018. The authors used a multivariate GARCH model to study the dynamics of the conditional correlation matrix of asset returns. It was found that the conditional variances and correlations of assets spike on and after the Brexit referendum and then quickly revert to normal levels, suggesting that the effect of the referendum was transient rather than structural. The findings are of interest to investors as co-movements of financial assets can significantly impact financial portfolios and hedging strategies. Design/methodology/approach The authors used a multivariate GARCH model to study the dynamics of the conditional correlation matrix of asset returns. Findings It was found that the conditional variances and correlations of assets spike on and after the Brexit referendum and then quickly revert to normal levels, suggesting that the effect of the referendum was transient rather than structural. Research limitations/implications The findings are of interest to investors as co-movements of financial assets can significantly impact financial portfolios and hedging strategies. Originality/value To the best of the authors’ knowledge, research studying the underlying asset co-movements around Brexit does not exist.