The Effect of “Brexit” Uncertainty on The FTSE 100 Index and The UK Pound

Abstract

We investigate the impact of the uncertainty surrounding the United Kingdom’s proposed departure from the European Community (“Brexit”) on financial assets. We conduct an event study around the November 14th 2018 draft withdrawal agreement. Our motivation was that the economic impact of the various political permutations that persisted throughout the negotiation period were both measurable and distinct. The probability of each Brexit scenario that was discussed varied over the political discourse. Using opinion poll data we investigate the event impact on both the FTSE 100 and the UK Pound. We found that, in accordance with existing academic evidence, asset prices discounted the weighted probabilistic economic impact of likely outcomes. We observe, however, that this impact was not as immediate as theory suggests. Interestingly, currency markets had the greater sensitivity. Our conclusions have important implications for the pricing of country risk premia in general and the European Union in particular. Key takeaways: 1) Asset prices were slow to discount the weighted probabilistic economic impact of Brexit risk. 2) Currency markets had the greater sensitivity to changes in Brexit risk. 3) Country risk premia can be impacted by perceived changes in custom union.