Brexit: Structural Break in European CDS and Bond Markets

In the following paper, we study the influence of Brexit on the relationship between government bond markets and credit default swap markets on data from Great Britain, France, the Netherlands, Spain, Italy, Sweden, Ireland and the US from December 2014 till December 2019. In fact, researching the link between the bond spread and the CDS premium seems to be important since it allows the participants of the market to be informed about how the studied dependence can change as a result of crisis events. Actually, the effect that Brexit made on credit risk markets that influenced on the various financial instruments still has not been studied properly. The analysis of CDS and state bonds spreads based on the Zivot-Andrews test indicates the structural breaks associated with Brexit for Ireland, Spain, France and the UK. Based on the VAR models, it was found that the bond market became leading after the referendum in countries where a shock was revealed.