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EJCE Year: 2019, June. Volume: 16 - Issue: 1

Brexit and CDS spillovers across UK and Europe

by Jamal Bouoiyour ; Refk Selmi

Start page: 105 - End page: 124

Keywords: Brexit, credit default swaps, explosivity, volatility, spillover effects, UK, Europe

Jel code: C13; C22; G12; G13

DOI: 10.25428/1824-2979/201901-105-124

Abstract:

The purpose of the paper is twofold. First, it aims at identifying when UK and European (France, Germany, Italy and Spain) Credit Default Swaps (CDSs) exhibit explosivity with respect to their past behaviors. Second, it seeks to quantify the dynamics of CDS volatility spillover effects surrounding the UK’s EU membership referendum commonly known as "Brexit". Using a recursive identification algorithm and new spillover measures suggested by Diebold and Yilmaz (2012), two interesting findings were drawn. We detect significant build-ups in CDS prices for all countries under study soon after the day relative to the announcement of Brexit. In addition, we show that the great uncertainty over Brexit generates significant risk spillovers across the underlined CDS. In particular, we find that UK, Italy and Spain are the "net volatility transmitters", while France and Germany seem the "net volatility receivers". Our findings may help in formulating appropriate regulatory policies and designing effective hedging strategies.

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