Brexit and Correlations of Equity Returns in France, Germany, Italy, Spain and the U.K.

Posted: 29 Apr 2018 Last revised: 17 Feb 2019

See all articles by Sylvia Gottschalk

Sylvia Gottschalk

Middlesex University - Business School

Date Written: April 10, 2018


This paper investigates whether the UK's referendum decision to leave the European Union ("Brexit") had a positive impact on portfolio risk diversification. We estimate weekly dynamic conditional correlations between 1973 and 2018, and then optimal sectoral portfolio allocations over the same period. Our results show that correlations of equity returns increased as a consequence of economic integration among European countries from the mid-1980s until the late 2000s, and decreased in the UK after Black Wednesday and the Brexit referendum. We tested the existence of a correlation change-point on 27th June 2016 by applying Wied, Kraemer, and Dehling (2012)'s correlation structural break test, which we modified to account for dynamic conditional correlations. Application of this test confirms that the referendum date was a break-point in a third of UK manufacturing industries. The failure of Lehman Brothers and the 1987 stock market crash were also identified as structural breaks in equity correlations. Moreover, our findings suggest that the Brexit vote may constitute a long-term trend reversal of the convergence of equity return correlations in European markets, akin to Black Wednesday, rather than a shock like the 1987 and 2008 financial crises, which merely intensified the historical upward trend in correlations of European equity returns.

Keywords: Brexit, dynamic conditional correlation (DCC) of equity returns, portfolio diversification, structural break in dynamic correlations, European financial integration

JEL Classification: G11, G15, F65, F36

Suggested Citation

Gottschalk, Sylvia, Brexit and Correlations of Equity Returns in France, Germany, Italy, Spain and the U.K. (April 10, 2018). Available at SSRN: or

Sylvia Gottschalk (Contact Author)

Middlesex University - Business School ( email )

The Burroughs
London, NW4 4BT
United Kingdom

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