Co-movements between the British pound, the euro and the Japanese yen: the Brexit impact

Abstract

PurposeThe purpose of this paper is to analyze the Brexit effect – pre-Brexit and post-Brexit referendum periods – on the co-movements between the British pound (GBP), the euro (EUR) and the yen (JPY) against the US dollar (USD).Design/methodology/approachTo ascertain the asymmetric behavior of dynamic correlations, the authors use the dynamic conditional correlation (DCC) model, the asymmetric dynamic conditional correlation (A-DCC) model and the diagonal BEKK model assuming Gaussian and Student’stdistribution. Several dummy variables have been included in order to identify the main periods related to Brexit.FindingsFindings show a negative impact of the pre-Brexit referendum period on the correlation between GBP and EUR, while there is no significant effect on GBP–JPY and EUR–JPY pairs. The loss of correlation in the GBP–EUR pairing has not recovered during the post-Brexit referendum period, which could be attributed to the uncertainty about the final impact of Brexit on British and Eurozone economies.Practical implicationsThe loss of correlation in the GBP–EUR pair has important implications for individual investors, portfolio managers and traders with respect to hedging activities, international trading and investment strategies.Originality/valueThe results are the first to address how Brexit has impacted on the co-movements between exchange rates using different multivariate models that allow for correlations to change over time.