Impact of Volatility Spillover on the Currency on Pound

Running Head : RESEARCH PROPOSAL
Research Proposal
Name of the Student
Name of the University
Author Note

Topic - The impact of volatility spillover on the currency on pound before and after brexit
Introduction
The spillover effect is the impact which seemingly unrelated events in a particular nation
can leave on the economics of the other countries. There are positive spillover effects also but
the term is mostly applied to the negative impacts of a domestic event on other parts of the world
such as stock market prices, earthquake etc connect to the macro environment (Plakandaras et
al.2017). From the perspectives of a U.S consumer, the positive spillover effect was seen during
the struggle of EU with the Greek debt crisis in the year 2015. The spillover effects are a kind of
network effects which has increased with the growth of globalisation in the stock and trade
markets depending on the financial connections between the world economies. The US- Canada
trade relationship is a good instance of spillover effects. This is because of the reason that the
main market of Canada is US through a wide margin across every export-oriented sector
(Alvarez-Diez, Baixauli. and Belda-Ruiz 2019). The volatility spillover effects of the economic
markets have been always a focus on the scholars and the regulation departments both globally
and internationally. Impact of Brexit on pound is amplified by the reliance of Canada on the US
market for the growth. From the reports of the year 2009, it is found that China has also become
a huge source of spillover effect as well.
In the recent years, study and research on the effect of the volatility spillover have been
focused on in the developed countries but it is quite less in the emerging markets. There have
been studies on the effect of volatility spillover between the stock price of the subjects and
exchange rates in almost six industrial countries such as the United Kingdom, the United States,

German, Japan, Canada and France. The outcomes showed that except for Germany, there were
significant effects of the volatility spillover to the exchange market from the stock market. There
is further the reverse effect that was faint from the exchange market to the stock market. Some
scholars believed that in the bigger and the mature countries, the domestic factors had influenced
the financial markets in a stronger way than all of the foreign factors
The decision of the United Kingdom for leaving the European Union that is brexit after
43 years has resulted in turmoil in the exchange rates and the Global stock market. Specifically
the pound which is relative to the dollar has almost lost 15% of its value in the week after
documentation of Brexit. The United Kingdom has finally left the European Union and a couple
of months it might have received a commemorative coin to remember. It has been reported that
planning for special 50 Pence Brexit coins were to be minted in the mass circulation which is
stamped with the plan departure date of October 31st and the message is that friendship with all
Nations. It is a sign of worry regarding Brexit which has impact on the value of the country's
currency and a group of British conservative lawmakers had written to the new Prime minister to
ask that if he can clarify what he would accept as a compromise in terms of negotiation with the
EU rather than going straight for the no-deal scenario.
The fluctuation of a particular variable in respect to the time is called volatility. There are
studies that have examined the connection between the foreign exchange market and the stock. It
is found that US dollar revaluation is related positively to the return of the stock market. On the
other hand, there are some negative connections too. Notably, the volatility spillovers between
all of the foreign exchange markets have been recognized by Bubak, Kocenda and Zikes (2011)
having taken the USD/EUR foreign exchange rates.

The aims and objectives
 To find out the way volatility spillover is applied of different currencies (Euro GBP JPY
and CHF ) over the different time periods .
 To find out if the volatility of the currencies is affected by the brexit.
The research questions
 Are the volatility spillovers among main currency such as Euro GBP JPY and CHF after
the brexit ?
 Is GBP the main volatility contributor?
The literature review
The financial supervision regulation department along with the scholars has always
focused on the volatility spillover effect of the financial markets. The stock markets and the
foreign exchange have returned gradually to the operations oriented with the market along with
the interactions between the markets which started appearing as the associated features. It is done
along with the China which extended the reform of the total management of the foreign
exchange (Wadsworth et al. 2016). With the liberalization and the international financial
integration acceleration, China’ volatility spillover effect extended the foreign exchange reform
with the structuring of the shareholder. With the international financial integration acceleration
and the liberalization, China’ volatility spillover effects on the stock market and foreign
exchange have increased gradually. The volatility spillover effect further reflects the second
moment relationship of the variable where the volatility of the market is fully influenced by the
early stage and also by the volatility that came from the market. The effect of the volatility
spillover exists quite widely in various types of the financial markets of various regions. It is a

significant aspect of volatility in all of the financial markets which instigates the process of
volatility conduction from one particular market to the another market.
The United Kingdom has preferred to leave the European Union which is thought as a
historic referendum on 2016 , June which is known as the referendum of Brexit. This withdrawal
from the EU membership that expected to have taken place in 2019 sometimes developed more
uncertainty for the households and the businesses across Europe to a different level in
forthcoming years. Also many academics along with the practitioners had started to express the
grave concerns in January 2016 when there was a discussion for the EU referendum that received
momentum in the political ambience of the United Kingdom. The policymakers, the business
communities such portfolio managers, the bankers , the investors searched for the strategies for
dealing efficiently with few financial environment and economic environments. However, this
type of effort needs a proper understanding of the dynamics of interdependence in its whole
concern. This is because of the fact that there were existing economic links with the United
Kingdom which played a significant role in the rest of the economies of Europe and the vice
versa.
The Brexit has introduced many uncertainties in the investment and the financial markets.
Due to the natural focus of the forex markets on the short term, a new instability has preceded a
sell-off. Pound has struggled because of the large debt of the United Kingdom. The British
government has been through the struggle of meeting the debt obligations that has undermined
the value of Pound. Also, the uncertainties of Brexit have made the currency market the haven of
the speculators. The exit from the EU has triggered a surge in the speculative trades in the entire
pound, rupee future markets with the volumes that are trebling. The rupee has also shown signs
of being weak. The recent turmoil in the two markets such as the US and the European market

has left impact on the whole world as there is a lot of volatility spillover in the economic markets
across the globe (Plakandaras, Gupta and Wohar 2017). There are also few developed economies
which are quite vulnerable to particular economic phenomena which can overwhelm the effects
of spillover. The United States, Japan and Eurozone are experiencing the effects of spillover
from China but this particular in fact is counteracted partially by the flights to safety by the
investors into the particular markets when the Global markets are getting quite shaky (Baur,
Dimpfl and Treepongkaruna 2018). When one of the economics struggling it is quite usual that
investments will go to one of the safe havens.
The study of Hong Li , Shamin Ahmed and Thanaset Chevapatrakul is aimed at the
systematic examination of the intensity and the nature of the volatility spillover dynamics within
and then across the four major stock markets such as France, Europe, Germany , the United
Kingdom and Switzerland. They employed the shock spillover measurement framework that was
popularized by Diebold and Yilmaz (2012). Further, the empirical framework founded on the
generalized vector auto-regression or the VAR which helped in quantifying the total spillover ,
the net directional spillover along with the net pairwise spillover. Particularly, they have
performed the full sample analysis that undercover the unconditional or average spillovers with
the rolling sample analsysis having characterized the conditional spillovers within and then
across the entire stock market. The understanding was much deepened regarding the volatility
spillover dynamics at the time of the baseline sample period having extended the empirical
analysis after using the infrared data of the four stock markets.
The study of Hong Li , Shamin Ahmed and Thanaset Chevapatrakul contributed a lot in
the existing literature on the integration of the financial market with the volatility spillover.
Firstly, they have uncovered the time-varying patterns of the volatility spillover along with the

extent to which the volatility spillover had transmitted across the major stock markets in the
whole Europe around the period of the financial and economic uncertainties staying that much
higher (Li, Ahmed and Chevapatrakul 2016). The empirical findings have been compared for the
baseline sample period along with analyzing the intraday total, the net directional, the gross
directional and the net pairwise spillover that are highly beneficial for the understanding of the
dynamics of financial market that has given such an unprecedented surge in the automated and
electronic trading in the last years. The empirical analysis further conveys some valuable
information for the practitioners, the policymakers and the financial institutes that had faced the
daunting tasks of the risk management and de-signing asset allocation.
The findings show that the stock markets in Germany and France were the large volatility
transmitter to the other countries. The stock markets of the Switzerland along with the United
Kingdom were the biggest volatility receiver from the other countries. The France and the United
Kingdom were under the net volatility volatility shock transmitter to the other countries. The
comparison further showed that the United Kingdom was both at the giving and at the receiving
ends of the net vitality transmission with half of the time at each of the ends. The intraday
volatility spillover index had stayed at the range of 20-30 percent. The common finding of the
paper show that the cross-market volatility enhances in a substantial way after following the
crises.
On the other hand, the paper of Yusaku Nishimura and Bianxia is aimed at extending the
spillover index of Diebold and Yilmaz to the whole high-frequency field. The spillover index is
proposed by Diebold and Yilmaz who have use of the forecast errors that resulted from the VAR
modeling. The Variance decomposition of the forecast error provides people the share of the
variance that is explained by the shock to a particular limited variable. It can fuehrer be used for

measuring the spillovers in the return of volatilities across few individual assets, the asset
markets, the asset portfolio and others. The paper is related most importantly with the literature
on the intraday periodicity of the high frequency return volatility. It then analyzes the USA high
frequency data for finding the apparent U-shaped pattern of the intraday return volatility which is
high in a relative manner at the opening and the closing periods along with the low at midday.
The empirical evidence is connected with the literature on the intraday of the high-frequency
return volatility (Nishimura and Sun 2018). The paper is related closely with the studies of the
volatility spillover effecting among all of the international financial market. There were previous
works at the opening along with the closing of the price data, the monthly data or the daily price
data. These are the works which demonstrate the consensus on the three points such as the
volatility spillover across all of the national borders that are observed among the other financial
markets , the spillovers from the other advanced economies specifically the United States to the
other markets which are observed clearly and the volatility spillovers which significantly
intensify the crisis that is well triggered by the Lehman Brothers demise.
Methodology
In the general since the exchange rates do exhibit the high volatility and sometimes the
data having generated the process is quite non-linear. Therefore the spillover index and VAR
with Eviews will be used for measuring the impacts. the spillover index is useful in measuring
the percentage of the five days ahead error variance of forecast for the system as a whole which
is explained by the bilateral spillovers. The larger values indicate the bilateral spillovers being

stronger.
The Eviews will also be used which is a combination of the power and the ease of use for
anyone who is working with the cross section the time series of the longitudinal data. The
Eviews help in efficiently managing the data performing the economic trick and the citizen
analysis generating forecast of the model simulations having produced high quality graphs and
tables for the publication of the intrusion in some other applications.
The proposed Research Design
The study will make use of the quantitative Data Collection having collected the
currencies over past 10 years from the data stream. The study will be based on the extraction of
annual data from the UK converted to the Euro. The datastream actually applies to the closing of
the World Market Reuters rate for the exchange. The data streams provides the current at the
historical time series on the stock in the stocks the future bonds commodities interest rates
options derivatives economic data and currency. The last 5 years data will be specially focused
on for answering the research questions and fulfilling the aim of the research. The data stream is

useful because it has a global coverage and depending on the serious most of the market data is
quite available on the daily basis and most of the economic data is for the available on quarterly
or monthly basis for stock the features of data stream is that results are easily downloadable to
Word Excel PowerPoint. There is a simplified search for data series and the data types to the
navigators. There is interactive chatting and help browsing tools and navigator for the data series
search. As a research philosophy the exploratory research philosophy will be used because it is
conducted for a particular problem. Exploratory design also helps in determining the best
practices the process of the data collection and the selection of subjects. The exploratory
Research Design can become conducted through Focus Group case studies the syndicated
research and others. This study will be based on the data collection from the data stream such as
currencies over past 10 years which is the quantitative data collection. The research aims are
concentrated on finding the way the volatility spillover is actually applied of different currencies
of different time periods and finding out if the volatility of the currencies affected by the brexit.
This research and objective are going to help in knowing factors which cause the volatility of the
currencies. It is also useful in applying the model for measuring the volatility of the currencies
along with the volatility spillover from one market to the other. The research questions are am
that the main currency such as Euro, CHF, GBP etc. This is because this phone main currency
increased after watching of UK regarding leaving EU and the volatility spillover from the UK.
The data analysis will consist of several stages such as the segregation of the collected data into
different categories according to the year. This data collection interpretation will be a
combination of the review literature with the outcomes of the study. This particular stage will be
10 then why the discovery of outcome of the study.
Conclusion

On a concluding note, it can be said that the study will be aimed at examining the impact
of the volatility spillover on the currency on pound before and after Brexit. This topic is one of
the most interesting topic and has been selected after special discussion with the supervisor. The
objectives of the study will be to find out the way volatility spillover is applied of the various
currencies over various time periods. It will also be aimed at finding out the currency volatility
that is affected by the Brexit. Though this, the factors that are the causes of volatility of
currencies will be known. It will also focus on the finding out of whether the volatility of the
currencies is affected by the Brexit. The research questions will revolve around the four primary
currencies such as EURO, GBP, JPY and CHF. As the mode of data collection the spillover
index and the EVIEWS will be used for measuring the volatility spillover.
The Ethical Consideration
The ethical considerations the study will follow all of the ethical guidance during
conducting a research. The secondary data will be cited properly and the sources of data will be
acknowledged. Sections section the article from which the information have been taken will be
will be given

Timeline
Activities 1st to
3rd
Week
4th to
10th
week
11th to
13th
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14th to
17th
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18th to
21st
Week
22nd
to 23rd
Week
24th
Week
Selection of the topic 
Data collection from
secondary sources
 
Creating layout 
Literature review   
Analysis and
interpretation of
collected data
  
Findings of the data  
Conclusion of the study 
Formation of draft  
Submission of final
work
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