Co-movements between the British pound, the euro and the Japanese yen: the Brexit impact

Purpose - The purpose of this paper is to analyze the Brexit effect - pre-Brexit and post-Brexit referendum periods - on the co-movements between the British pound (GBP), the euro (EUR) and the yen (JPY) against the US dollar (USD). Design/methodology/approach - To ascertain the asymmetric behavior of dynamic correlations, the authors use the dynamic conditional correlation (DCC) model, the asymmetric dynamic conditional correlation (A-DCC) model and the diagonal BEKK model assuming Gaussian and Student's t distribution. Several dummy variables have been included in order to identify the main periods related to Brexit. Findings - Findings show a negative impact of the pre-Brexit referendum period on the correlation between GBP and EUR, while there is no significant effect on GBP-JPY and EUR-JPY pairs. The loss of correlation in the GBP-EUR pairing has not recovered during the post-Brexit referendum period, which could be attributed to the uncertainty about the final impact of Brexit on British and Eurozone economies. Practical implications - The loss of correlation in the GBP-EUR pair has important implications for individual investors, portfolio managers and traders with respect to hedging activities, international trading and investment strategies. Originality/value - The results are the first to address how Brexit has impacted on the co-movements between exchange rates using different multivariate models that allow for correlations to change over time.