Return and volatility spillover between India, UK, USA and European stock markets: The Brexit impact

  • Received November 15, 2021;
    Accepted February 1, 2022;
    Published February 8, 2022
  • Author(s)
  • DOI
    http://dx.doi.org/10.21511/imfi.19(1).2022.09
  • Article Info
    Volume 19 2022, Issue #1, pp. 121-134
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This work is licensed under a Creative Commons Attribution 4.0 International License

The 2016 Brexit referendum created potential turmoil in financial markets. The purpose of this study is to examine the impact of the Brexit referendum on the return and volatility spillover between the EU, the UK, and the USA stock markets and the Indian stock market during the pre- and post-Brexit referendum period. The VAR and bivariate GARCH BEKK models were employed. The study results suggest that before the Brexit referendum, Indian stock market returns made no significant return spillover on the other markets. On the contrary, following the referendum, Indian stock returns significantly spilled over to France, Germany, the UK, and the USA stock market returns. The study results also identified a substantial increase in the bidirectional volatility spillover between India-France, India-UK, and India-USA during the post-Brexit referendum period. Therefore, the investors’ opportunity to invest simultaneously in India, UK, EU, and US stock markets for portfolio diversification is limited. India was affected mainly by its own past shocks before the Brexit referendum. However, after the Brexit referendum, Indian markets are getting more and more integrated with other markets. In order to reap the diversification benefits, a prudent investment strategy will need to be developed in the future, especially during times of economic and political uncertainty and market crisis.

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    • Figure 1. Daily index series for the pre-Brexit referendum period
    • Figure 2. Daily index series for the post-Brexit referendum period
    • Table 1. Descriptive statistics of index returns
    • Table 2. Correlation matrix between index returns
    • Table 3. Pre-Brexit referendum period, VAR model
    • Table 4. Post-Brexit referendum period, VAR model
    • Table 5. Parameter estimates for the bivariate GARCH BEKK model
    • Conceptualization
      Sangeetha G Nagarakatte, Natchimuthu Natchimuthu
    • Data curation
      Sangeetha G Nagarakatte
    • Formal Analysis
      Sangeetha G Nagarakatte, Natchimuthu Natchimuthu
    • Funding acquisition
      Sangeetha G Nagarakatte
    • Investigation
      Sangeetha G Nagarakatte
    • Methodology
      Sangeetha G Nagarakatte, Natchimuthu Natchimuthu
    • Project administration
      Sangeetha G Nagarakatte, Natchimuthu Natchimuthu
    • Resources
      Sangeetha G Nagarakatte
    • Software
      Sangeetha G Nagarakatte, Natchimuthu Natchimuthu
    • Supervision
      Sangeetha G Nagarakatte, Natchimuthu Natchimuthu
    • Validation
      Sangeetha G Nagarakatte, Natchimuthu Natchimuthu
    • Visualization
      Sangeetha G Nagarakatte, Natchimuthu Natchimuthu
    • Writing – original draft
      Sangeetha G Nagarakatte
    • Writing – review & editing
      Sangeetha G Nagarakatte, Natchimuthu Natchimuthu