The impact of political uncertainty on fixed income markets: The case of Brexit

Abstract

This thesis provides an impact study of political uncertainty induced by Brexit on the performance of selected UK government bonds and UK government CDS with matching maturities seperately. For the bonds, a cointegration and ECM method is applied, whereas for the UK government CDS, a GARCH-X(1,1) approach has been chosen. In order to proxy the political uncertainty caused by Brexit, the Bloomberg Brexit news ticker index is chosen and introduced to the methods concerning bonds and CDS as a regressor. The Brexit news index is furthermore distinguished into positive and negative news at the 90th percentile in order to verify effects of increasing or decreasing political uncertainty in the UK due to Brexit on the performance of UK government bonds and their CDS contracts matching in maturity.