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What might happen to the global stock market after Brexit?

Zhiyuan Ren (School of Statistics and Mathematics, Zhejiang Gongshang University, Hangzhou, China)

Studies in Economics and Finance

ISSN: 1086-7376

Article publication date: 3 February 2022

Issue publication date: 28 February 2022

321

Abstract

Purpose

The stock market is vulnerable to various exogenous factors, and its fluctuations can reflect the effects of political, economic and market factors. The purpose of this paper is therefore to choose the stock market as a representative to analyze the potential impact of the Brexit event on global financial markets and how to prevent the spread of risks across global financial markets.

Design/methodology/approach

This study chooses the auto-regressive moving average generalized autoregressive conditional heteroscedasticity (ARMA-GARCH) model to fit the financial series and uses it as the marginal distribution model to establish the vine copula model. The maximum spanning tree algorithm is used to select the optimal rattan structure model and pair-copula function. According to the final ARMA-GARCH-R-vine copula model, the tail correlation coefficients of the UK, France, Germany, USA and China stock markets are calculated and used to analyze their dependence structure.

Findings

The negative impact of the Brexit event on the British stock market is greater and is more likely to be transmitted to France and Germany. China and the USA are less likely to be impacted by the Brexit incident. The US financial market is more closely linked to France, and it may benefit from the Brexit incident due to the impact of the exchange rate. Although the Chinese stock market is directly connected to the British stock market, due to the existence of national macro-controls and other factors, it will be less affected by the Brexit incident. The main impact comes from the dual devaluation pressure on the RMB.

Originality/value

This paper selects the optimal combination model based on actual data, and the results obtained can accurately reflect the interdependence between relevant stock markets and can guide risk aversion in the financial investment field.

Keywords

Acknowledgements

This paper was written by the author on an academic visit to the University of Plymouth, UK. The author thanks the Centre for Mathematical Sciences of the University of Plymouth for their hospitality and also the School of Statistics and Mathematics of Zhejiang Gongshang University for their funding for this visit. Thanks also go to Dr Matthew Craven of the University of Plymouth for supervision, and finally to Dr Rana Moyeed of University of Plymouth and Prof Yizhi Chen of Zhejiang Gongshang University for guidance at certain points during the work.

This paper was completed by the author during a sponsored visit to the University of Plymouth by Zhejiang Gongshang University and does not have a specific grant number.

Citation

Ren, Z. (2022), "What might happen to the global stock market after Brexit?", Studies in Economics and Finance, Vol. 39 No. 2, pp. 177-192. https://doi.org/10.1108/SEF-09-2020-0392

Publisher

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Emerald Publishing Limited

Copyright © 2021, Emerald Publishing Limited

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