Brexit Premium in Corporate Bonds: Evidence from British "Yankee" Bonds
Speaker: Hui Xu (Lancaster University)
Date: Nov 25, Wednesday, 2020
Time: 12:00 pm - 1:00 pm
Venue: Zoom (ID: 91625913444, you may join the zoom meeting via https://nyu.zoom.us/j/91625913444)
Abstract:
We study the impact of Brexit on corporate bond markets. The yield spread difference between British Yankee bonds and US corporate bonds increases dramatically when the EU-UK concluded their membership negotiation in February 2016. Our difference-in-difference analysis shows that Brexit uncertainty increases the bond yield spreads by 32%. The effect is long lasting and present in the bond market one year after the referendum. We find that Brexit primarily unfolds itself as credit risk instead of liquidity risk in the bond market, and affects bond yields predominantly through issuers’ equity volatility. In addition, the term structure of bonds indicates that the medium-long-term adverse impact of Brexit on the economy is the most pronounced. Our results highlight the finance channels through which the political uncertainty affects the economy and suggest proper policies to bolster the credit markets.
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