Uncertainty Across the Pond: An Evaluation of Equity Market Returns and Currency Fluctuations in Reaction to Key Brexit Events

Abstract

The citizens of the United Kingdom shocked the world on June 23rd, 2016 when they voted in favor of leaving the European Union. The 3-year aftermath of the Referendum has created a large amount of uncertainty regarding the future of the United Kingdom economy and its post-Brexit relationship with the European Union. The purpose of this research is to explore how the financial markets react to Brexit news headlines, compare the returns of European and non-European exchange-traded funds (ETFs) and currencies, identify common themes, and ultimately shed light on how investors weigh-in on the interconnectedness of the UK, the EU, and the broader global markets. After researching the major milestones in the development of Brexit, twenty-three different events were selected for this study. To look at the financial market’s reaction, UK, EU, Germany, United States, and South African ETFs and currency returns in response to Brexit news were recorded. The results show that positive Brexit news headlines are a universal benefit but generate higher returns for the European Union and Germany as opposed to the United Kingdom itself, and that shared negative returns affect the United Kingdom to a greater extent. Investors are pricing in the uncertain and negative implications of Brexit to the point where the United Kingdom has limited upside and plenty of downside within the realms of the financial markets