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<p>We study the impact of the Brexit vote on tail risk in the UK financial markets. To this end, we estimate a widely used measure of risk, the Value at Risk, as an indicator of tail risk. We use extreme value theory, based on the peaks-over-threshold method, to model the extremes over a high threshold before and after the UK’s momentous decision to leave the European Union employing non-parametric and semi-parametric estimation techniques. We apply a bias-corrected method to reduce small sample estimation bias through a non-parametric bootstrap simulation. For the analysis, we focus on the FTSE-100 index, the GBP/EUR exchange rate, the Treasury Gilt, and nine credit default swaps of the most important industry sectors. The findings suggest that the new structure of downside tail risk -either frequency or magnitude- associated with large losses is not higher than its pre-Brexit levels. However empirical evidence suggests that the upside-tail estimates (i.e., the likelihood of large profits) have now decreased.</p>

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How does the Brexit vote affect tail risk? An extreme value approach for the UK financial markets

  • 期刊论文

  • 出版模式：

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  • 发表日期：

    2025年6月17日

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  • Konstantinos Gkillas,
  • Lavrentios Vasiliadis

摘要

We study the impact of the Brexit vote on tail risk in the UK financial markets. To this end, we estimate a widely used measure of risk, the Value at Risk, as an indicator of tail risk. We use extreme value theory, based on the peaks-over-threshold method, to model the extremes over a high threshold before and after the UK’s momentous decision to leave the European Union employing non-parametric and semi-parametric estimation techniques. We apply a bias-corrected method to reduce small sample estimation bias through a non-parametric bootstrap simulation. For the analysis, we focus on the FTSE-100 index, the GBP/EUR exchange rate, the Treasury Gilt, and nine credit default swaps of the most important industry sectors. The findings suggest that the new structure of downside tail risk -either frequency or magnitude- associated with large losses is not higher than its pre-Brexit levels. However empirical evidence suggests that the upside-tail estimates (i.e., the likelihood of large profits) have now decreased.