The Effect of the EU Referendum on the GBP:
Evidence From Brexit
Jelena Janjusevic and William Chegeni
Abstract
The UK not being part of the EU has major implications
on the nation’s economy, which ultimately affected the
GBP’s exchange rate. In 2016, the GBP hit a 31-year low
against the dollar following the steady plummet in the
wake of the Brexit. As the Brexit was an isolated event,
which has substantial implications on the country’s
currency exchange, through an event-study, the extent
to which the currency exchange experienced volatility
due to this event can be determined. This research will
focus on an isolated event, which will be used to
determine the extent to which the GBP’s exchange rate
was affected by Brexit. Using the event study methodology and two different models: the market model and the
mean average return model, this research estimates the
abnormal returns for the EU referendum event. Coupled
with macroeconomic factors, which are implied by the
referendum, the research investigates the potential causes
for currency market uncertainty within the UK. As there
are not many studies which cover the effects of political
announcements in developed economies, this study
provides some insight on how a developed nation’s
currency can be affected by unexpected political
announcements and news, with a specific focus on the
Brexit vote outcome.
1 Introduction
The foreign exchange market is the largest and most frequently traded financial market globally. Approximately USD 4 trillion is traded globally each day. Due to the
interconnectedness of the global forex market, events
occurring at any one point in time across the globe can have
an instantaneous effect on exchange rates and inherently on
currency values. Elections and political events are common
in most nations and have proven to have an effect on a
nation’s currency.
The European Union referendum of June 2016 (also
known as Brexit), resulted in the UK voting to leave the
European Union. The vote result shocked the world, since
polls indicated that the ‘remain’ side had the majority votes.
The UK not being part of the EU has major implications on
the nation’s economy, which ultimately affected the GBP’s
exchange rate. In 2016, the GBP hit a 31-year low against
the dollar following the steady plummet in the wake of
Brexit. As Brexit was an isolated event, which has substantial implications on the country’s currency exchange,
through an event study, the extent to which the currency
exchange experienced volatility due to this event can be
determined. This research will focus on an isolated event,
which will be used to determine the extent to which the
GBP’s exchange rate was affected by Brexit.
As there are not many studies which cover the effects of
political announcements in developed economies, this study
will provide some insight on how a developed nation’s
currency can be affected by unexpected political announcements and news, with a specific focus on the Brexit vote
outcome. The GBP is one of the strongest currencies globally and is extremely stable; hence, its continued decline was
a cause for concern. This study intends to solidify the idea
that uncertainty may have implications that have a significant and direct effect on an economy’s exchange rate.
The main aim for this paper is to determine the extent to
which the Brexit outcome explains the unanticipated variation in the value of the GBP’s exchange rate, in an attempt to
demonstrate that even developed economies are prone to
significant currency exchange rate volatility following a
significant political event outcome and the uncertainty that
may arise because of them. The goal of the event study is to
successfully measure the abnormal returns of the GBP
J. Janjusevic (&) Á W. Chegeni
Heriot Watt University, Dubai, UAE
e-mail: j.janjusevic@hw.ac.uk
W. Chegeni
e-mail: wchegeni@hotmail.com
© Springer Nature Switzerland AG 2020
M. Mateev and J. Nightingale (eds.), Sustainable Development and Social Responsibility—Volume 1,
Advances in Science, Technology & Innovation, https://doi.org/10.1007/978-3-030-32922-8_22
227
Evidence From Brexit
Jelena Janjusevic and William Chegeni
Abstract
The UK not being part of the EU has major implications
on the nation’s economy, which ultimately affected the
GBP’s exchange rate. In 2016, the GBP hit a 31-year low
against the dollar following the steady plummet in the
wake of the Brexit. As the Brexit was an isolated event,
which has substantial implications on the country’s
currency exchange, through an event-study, the extent
to which the currency exchange experienced volatility
due to this event can be determined. This research will
focus on an isolated event, which will be used to
determine the extent to which the GBP’s exchange rate
was affected by Brexit. Using the event study methodology and two different models: the market model and the
mean average return model, this research estimates the
abnormal returns for the EU referendum event. Coupled
with macroeconomic factors, which are implied by the
referendum, the research investigates the potential causes
for currency market uncertainty within the UK. As there
are not many studies which cover the effects of political
announcements in developed economies, this study
provides some insight on how a developed nation’s
currency can be affected by unexpected political
announcements and news, with a specific focus on the
Brexit vote outcome.
1 Introduction
The foreign exchange market is the largest and most frequently traded financial market globally. Approximately USD 4 trillion is traded globally each day. Due to the
interconnectedness of the global forex market, events
occurring at any one point in time across the globe can have
an instantaneous effect on exchange rates and inherently on
currency values. Elections and political events are common
in most nations and have proven to have an effect on a
nation’s currency.
The European Union referendum of June 2016 (also
known as Brexit), resulted in the UK voting to leave the
European Union. The vote result shocked the world, since
polls indicated that the ‘remain’ side had the majority votes.
The UK not being part of the EU has major implications on
the nation’s economy, which ultimately affected the GBP’s
exchange rate. In 2016, the GBP hit a 31-year low against
the dollar following the steady plummet in the wake of
Brexit. As Brexit was an isolated event, which has substantial implications on the country’s currency exchange,
through an event study, the extent to which the currency
exchange experienced volatility due to this event can be
determined. This research will focus on an isolated event,
which will be used to determine the extent to which the
GBP’s exchange rate was affected by Brexit.
As there are not many studies which cover the effects of
political announcements in developed economies, this study
will provide some insight on how a developed nation’s
currency can be affected by unexpected political announcements and news, with a specific focus on the Brexit vote
outcome. The GBP is one of the strongest currencies globally and is extremely stable; hence, its continued decline was
a cause for concern. This study intends to solidify the idea
that uncertainty may have implications that have a significant and direct effect on an economy’s exchange rate.
The main aim for this paper is to determine the extent to
which the Brexit outcome explains the unanticipated variation in the value of the GBP’s exchange rate, in an attempt to
demonstrate that even developed economies are prone to
significant currency exchange rate volatility following a
significant political event outcome and the uncertainty that
may arise because of them. The goal of the event study is to
successfully measure the abnormal returns of the GBP
J. Janjusevic (&) Á W. Chegeni
Heriot Watt University, Dubai, UAE
e-mail: j.janjusevic@hw.ac.uk
W. Chegeni
e-mail: wchegeni@hotmail.com
© Springer Nature Switzerland AG 2020
M. Mateev and J. Nightingale (eds.), Sustainable Development and Social Responsibility—Volume 1,
Advances in Science, Technology & Innovation, https://doi.org/10.1007/978-3-030-32922-8_22
227