Brexit and Contagion in Global Financial Markets

The shock of the Brexit referendum on June 23, 2016 drove a dramatic reaction in global financial markets. The chapter examines volatility and contagion in three important segments of the global capital markets: stock, government bond, and currency markets. The chapter documents the price/rate behavior pre- and post-referendum and discusses the implication for international diversification. The global stock markets lost trillions of capitalizations the day after Britain’s surprise vote to withdraw from the European Union. The government bond yields dropped to record lows in countries where investors sought flight-to-safety. The British Sterling depreciated to a low level. The stock markets rebounded to higher than the pre-referendum levels by July, government bond yields went lower, and the British Sterling continued to slide. The results also show evidence of contagion from Brexit vote to the Japanese and US stock markets. Furthermore, the results show correlations of yields on government securities in UK with those in PIIGS countries increased significantly.