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British-European Trade Relations and Brexit: An Empirical Analysis of the Impact of Economic and Financial Uncertainty on Exports

by Ansgar Belke 1,2,* and Sebastian Ptok 3
1
Institute for Business and Economic Studies (IBES), University of Duisburg-Essen, Berliner Platz 6-8, 45127 Essen, Germany
2
Centre for European Policy Studies (CEPS), Place du Congrès 1, 1000 Brussels, Belgium
3
Institut für Mittelstandsforschung Bonn (IfM), Maximilianstraße 20, 53111 Bonn, Germany
*
Author to whom correspondence should be addressed.
Int. J. Financial Stud. 2018, 6(3), 73; https://doi.org/10.3390/ijfs6030073
Received: 14 May 2018 / Revised: 16 July 2018 / Accepted: 8 August 2018 / Published: 17 August 2018
(This article belongs to the Special Issue Impact of Brexit on Financial Markets)
Brexit, the withdrawal of the United Kingdom (UK) from the European Union (EU), has led to significant exchange rate fluctuations and to uncertainty in financial markets and in UK–EU trade relations. In this article, we use a non-linear model to study how this uncertainty affects export companies. Exports tend to react in spurts when exchange rate fluctuations go beyond a band of inaction, referred to here as a “play area”. We apply an algorithm to study this hysteretic relationship with ordinary least squares (OLS) regressions. We examine the export relationship between Europe (Belgium, Germany, France, Italy, and The Netherlands) and the UK. To guarantee the robustness of the results, we estimate a variety of specifications for modeling economic uncertainty: (a) constant uncertainty, (b) exchange rate volatility, (c) volatility in European equity markets, (d) the Treasury Bill EuroDollar Difference (TED-spread), (e) the Economic Policy Uncertainty Index (EPUI), and (f) a combination of exchange rate volatility and the EPUI. Since the results show little evidence of hysteretic effects on British exports, we focus on the European side. The specifications including exchange rate and equity market volatility show a significant effect of hysteresis. View Full-Text
Keywords: Brexit; uncertainty; play-hysteresis; exports; exchange rate volatility; stock market volatility Brexit; uncertainty; play-hysteresis; exports; exchange rate volatility; stock market volatility
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Belke, A.; Ptok, S. British-European Trade Relations and Brexit: An Empirical Analysis of the Impact of Economic and Financial Uncertainty on Exports. Int. J. Financial Stud. 2018, 6, 73.

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