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Impacts of Brexit on bonds issued by British firms.

Impacts of Brexit on bonds issued by British firms.

Assess the impacts of Brexit on bonds issued by British firms by comparing to bonds issued by US firms during Jan 2015 and Dec 2017

Brexit represents a serious institutional and politics modify for the Uk and the EU27/Eurozone and consequently could affect the thought of chance with regard to both UK and Eurozone bonds. With the EU aiming to complete the banking union and the capital market union, respectively – with effectively a strong focus on the Eurozone – the role of corporate bonds markets in the Eurozone has increased, while in the UK corporate bonds have traditionally played a large role. From this perspective, the issue as to what extent Brexit will affect the corporate bond markets in the EU28 is all the more important. In our analysis we try to capture and measure the effect of the UK’s decision to leave EU28 (Brexit) on the risk conditions in the United Kingdom (UK) and euro area (EA), i.e. Eurozone, corporate bond markets.

As brings about are intensely disposed to diverse types with the all round weblink market place, they do not represent the proper treatment for document and decide danger conditions in the organization weblink company. On account of this, in our study we use the yield spread (sometimes just called the credit spread), i.e. that part of corporate bond yield that is above the yield of risk-free bonds – most prevalently government bonds with an equivalent maturity. The resulting corporate bond yield spreads as an indicator of a risk premium are expected to express the risk conditions exposure of firms in the UK and Eurozone. This issue is of key importance from a corporate finance but also from a policymaker’s perspective because the UK’s leaving of the EU (most probably on March 29th, 2019) will directly affect capital market structure as well as the timing of debt and fund-rising decisions.

Therefore, our papers is related to the literature which focuses on the straightforward-word effects of Brexit on stock markets. These studies elaborate on the impact of Brexit on stock markets, exchange rates, and interest rates. Davies and Studnicka (2017) analyze the effects of Brexit-related events on stock movements in the UK by using event study methods. They find that the announcement of the referendum’s result led to a sharp decline of the FTSE 350. Also by conducting an event study, Ramiahet al. (2017) find that stock prices of financials were particularly affected by the Brexit referendum. Belke et al. (2016) study the impact of Brexit on policy uncertainty and international financial markets. They find that international stock markets were affected by an increase in the probability of Brexit. Moreover, Belke et al. (2016) find that European stock market indices were affected by an increase in the likelihood of Brexit and that the effects between European countries were similar.

By making use of long-memory space tactics, Caporale, Gil-Alana, and Trani (Caporale et al. 2018) find that the Brexit referendum led to significant changes in the degree of persistence of the FTSE 100 Implied Volatility Index and on the British pound’s implied volatility vis-à-vis the euro and the US dollar, respectively. Many studies also elaborate on the impact of Brexit on exchange rates. For instance, Korus and Celebi (2018) examine the impact of Brexit-related news on the spot exchange rate of the British pound against the euro. By splitting Brexit-related events into ‘good’ Brexit news and ‘bad’ Brexit news, they find that, bad Brexit news is associated with a depreciation of the British pound against the euro whereas good Brexit news appreciates the Pound sterling against the euro. The Bank of England (2016) examines the impact of the Brexit referendum on interest rates in the United Kingdom. It finds no clear impact of referendum-related news on short-term interest rates. Belke et al. (2016) also elaborate on the impact of Brexit on long-term interest rates. Their empirical results suggest that an increase in the Brexit probability decreased 10-year government bond yields in the UK and in risk-free countries, respectively. However, they do find that sovereign CDS for 10-year government bonds increased in the UK due to Brexit. This could suggest that there are no broadly convergent expectations amongst financial market actors which would not be surprising given the fact that Brexit is a historical and unprecedented change in EU integration.

An essential element of our assessment with this document would be to establish and quantify the influence of Brexit-related events on opportunity circumstances throughout the uk and EA business and business connection marketplaces, respectively. We focus on the yield spread of corporate bonds, defined as the yield differential of a corporate bond relative to that of a benchmark government bond yield with a similar maturity. We use daily data for the period from January 2013 to March 2018. We consider major determinants of corporate bond yield spreads, which are largely based and affirmed by previous studies in this field.

Several conclusions are of any particular interest. First, we investigate whether the announcement of the Brexit referendum result had an impact on UK and EA credit spreads for bonds with a remaining maturity of 1–3 years, 3–5 years, 5–7 years, 7–10 years and 10+ years, including all rating groups, respectively. We find that the effect of the referendum outcome on corporate bond markets is stronger in the UK market than in the EA market. Second, differentiating between the financial and the non-financial economic sectors allows us to analyze more specific sector-related effects of the referendum result. Our results indicate that the impact of Brexit on credit spreads for a given maturity is higher for financials than for non-financials, especially in the EA where corporate bond spreads in the non-financial sector were hardly or not at all affected by the referendum result. Third, we split our sample into pre-referendum and post-referendum periods, to consider the potential changing evaluation of the determinants of corporate bond spreads due to altering risk pricing triggered by the Brexit referendum result. We find that the impact of determining variables on corporate bond yield spreads in the UK and EA is not constant over time and that particularly the effect of credit default risk is far stronger and plays a significant role in the post-referendum period in UK and EA, respectively.

This document is different from other individuals because, to the very best of our details, we are definitely the original to gauge the outcome of Brexit on company connection provide propagates in britain and EA. Further contributions of this study are as follows: (I) It extends the existing literature on corporate bond yield spreads in the UK and EA, which to date is rather scarce, while (II) analyzing the UK and EA corporate bond markets simultaneously allows for a direct comparison of the two markets and (III) it is the first to use the forward swap market as an explanatory variable for credit spread.

The note with this document is arranged the following. Section 2 presents the theoretical background and gives a review of related empirical literature. Section 3 presents the data used in this study. In section 4, we examine the theoretical determinants of credit spreads and discuss our empirical results. Section 5 delivers time-varying estimation results before, section 6 finally concludes.