ANALYSIS ON BREXIT EFFECT

Abstract

We study the effect of Brexit on the financial integration in Europe. As an indicator of financial market, stock indices of FTSE (U.K.), DAX (Germany), MIB (Italy) and COPEN (Denmark) are collected. We consider the date of Brexit announcement as the cutoff point and divide our samples into two groups. We investigate correlation coefficients and conditional correlations to study the microstructure among the stock markets and conclude that the dependence of the U.K.’s stock market on German, Italian and Danish stock markets has become weaker after the Brexit indicating economic disintegration. To conduct our main analysis, we use copulas to define the degree of integration. Particularly, we specify the best fit models in a D-vine structure and estimate the copulas semiparametrically. Further, the estimation based on the vine copula shows its superioty in capturing the bivariate dependencies, while the result obtained from the standard multivaraite copula estimation can be misleading.