S&amp;P500 volatility and Brexit contagion

Gomes, Matheus Vinicius; Cicogna, Maria Paula Vieira

doi:10.1590/1806-9649-2022v30e8422

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ORIGINAL ARTICLE • Gest. Prod. 30 • 2023 • https://doi.org/10.1590/1806-9649-2022v30e8422 copy

S&P500 volatility and Brexit contagion

Volatilidade do S&P500 e o contágio do Brexit

Authorship SCIMAGO INSTITUTIONS RANKINGS

Abstract

This paper investigated the existence of contagion between S&P500 and FTSE100 stock indexes, the two major stock exchange markets in the world, due to Brexit. Brexit caused a wave of volatility in international financial markets and the immediate reaction in US market has brought instability among investors, who remained cautious regarding the unexpected unfolds over the global economy. Dynamic conditional correlation model (DCC GARCH) was applied to analyze the shift-contagion phenomenon in the time series data. The results showed that there was no evidence of shift-contagion between the two markets during the Brexit period. It was possible to observe a moderate increase in the conditional correlation during the month of the Brexit referendum, which may be due to the high interdependence between the two asset markets.

Keywords:
Brexit; S&P 500; FTSE100; Contagion; Volatility

Period	25/06/2013 - 30/06/2019
Indices	FTSE100 (%)	S&P500(%)
Minimum	-2.07582	-1.81720
1º Quartile	-0.19179	-0.12669
Median	0.01932	0.02200
Mean	0.00550	0.01749
3º Quartile	0.19876	0.20123
Maximum	1.52673	1.66297
Std. Deviation	0.36337	0.35079
Asymmetry	-0.17757	-0.59533
Kurtosis	2.55650	3.26560

	Dickey Fuller	Lag Order	P-valor
FTSE100	-11.99554	11	0.0100^ 1% significance. Both series reject the null hypothesis of the existence of a unit root and therefore the non-presence of stationarity in the time series.
S&P500	-11.72786	11	0.0100**

	FTSE100 AR(1)	S&P500 AR(2)
Minimum	-2.09014	-1.84114
1º Quartile	-0.19816	-0.14486
Median	0.01469	0.00489
Mean	0.00000	-0.00000
3º Quartile	0.19093	0.18586
Maximum	1.52918	1.60056
Std. Deviation	0.36336	0.35069
Asymmetry	-0.18377	-0.62186
Kurtosis	2.55940	3.25585

	FTSE100 AR(1)	S&P500 AR(2)
	0.00550	0.01749
	0.00068	0.00008
	-0.00705	-0.00568
	0.00009	0.00068
	-	-0.02350
	-	0.00068

Model	Parameters	Akaike	BIC
DCC (1,1)	13	0.82157	0.86837
DCC (1,2)	14	0.82286	0.87327
DCC (2,1)	14	0.82293	0.87334
DCC (2,2)	15	0.82422	0.87823

Parameters	Estimative	Std. Error	t-test	P-value
FTSE100ω	0.00880	0.00317	2.77121	0.00558^* * Significant at 1%. All variables are statistically significant.
FTSE100α	0.13682	0.03112	4.39658	0.00001*
FTSE100β	0.79268	0.04813	16.46866	0.00000*
S&P500ω	0.00838	0.00242	3.45633	0.00054*
S&P500α	0.17584	0.03586	4.90321	0.00000*
S&P500β	0.75766	0.03930	19.27448	0.00000*
ρ1	0.00263	0.00211	1.24359	0.21364
ρ2	0.99224	0.00682	145.38229	0.00000*

	S&P500	FTSE100
Minimum	-6.37936	-4.87454
1º Quartile	-0.51668	-0.59042
Median	0.03340	0.02061
Mean	-0.00896	-0.02102
3º Quartile	0.56780	0.57540
Maximum	3.37933	3.84937
Std. Deviation	0.99706	1.00244
Asymmetry	2.95997	1.32373
Kurtosis	-0.78235	-0.27844

	Residuals		Squared residuals
	Statistic	P-value	Statistic	P-value
S&P500	42.02672	0.00274^* * Significant at 1%. Ljung-Box null hypothesis was rejected at 1% significance level for both variables.	578.12240	2.2e-16*
FTSE100	43.60160	0.00170*	766.26090	2.2e-16*

	Residuals		Standardized residuals
	Statistic	P-value	Statistic	P-value
Breusch-Pagan	6.93203	0.00846^* * Statistic rejected at 5% of significance. **Statistic rejected at 1% significance. Breuch-Pagan null hypothesis of absence of heteroscedasticity was rejected at 1% significance level. Durbin-Watson statistic will always have a value ranging between 0 and 4: values below 2.0 mean there is positive autocorrelation and above 2.0 indicates negative autocorrelation. Lag Factor Test null hypothesis of lagged residuals has explanatory power over its previous one was rejected at 5% significance level.	1.38246	0.23968
Durbin-Watson	2.22153	0.99998	2.07777	0.93233
Lagged S&P500	1.96991	0.04903**	-1.35676	0.17506

Universidade Federal de São Carlos Departamento de Engenharia de Produção , Caixa Postal 676 , 13.565-905 São Carlos SP Brazil, Tel.: +55 16 3351 8471 - São Carlos - SP - Brazil
E-mail: gp@dep.ufscar.br

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[1] Authors contribution:

Data collection was coordinated by Matheus Gomes, as well as data analysis and theoretical-methodological approach. Maria Paula Vieira Cicogna worked on the conceptualization and theoretical. All authors worked together in the writing and final revision of the manuscript.