exchange rate during the event window period. The research
employs different methodologies for a better assessment of
the results and for comparison, both models are revisited in
the literature review. Additionally, the results are compared
for the two models for which they will both undergo a
robustness test. Moreover, this research will highlight any
limitations with the research and assess the validity of the
model that is being applied.
Even though numerous event studies have been carried
out on developed nations, there has not been an extensive
amount of research done on political outcomes and their
effect on foreign exchange rates in developed economies, as
there are other factors that also have substantial and proven
effects on a country’s exchange rate other than political
event outcomes. Though political events have been referred
to in the past to explain day to day movements in currencies,
they are often circumstantial, and no real assessment has
been carried out to determine the extent to which the events
can explain for the results.
‘Markets like good news. Markets dislike bad news, but
markets hate uncertainty’, (Willis Sparks, 2016, Middle East
Investment Conference). Currency volatility can be brought
on by uncertainty, which in turn leads to economic consequences on trade and other macroeconomic factors. This
paper does not aim to unearth or prove the macroeconomic
issues that may be brought on by a depreciating currency but
will shed some light on why a currency may rapidly
depreciate following news that leaves a cloud of doubt and
uncertainty as to what the future may hold for an economy.
It is also expected that developing or emerging nations are
most likely to suffer from currency exchange volatility;
however, this research hopes to show that even developed
nations are prone to variations in exchange rates due to
political changes or instability.
The Brexit vote was a political event; however, political
events generally come hand in hand with macroeconomic
implications. This research’s main objective is not to analyze
the long-lasting effects of the referendum but will comment
on the macroeconomic factors which are the cause of
uncertainty. This study will primarily focus on the event
itself rather than the implications that the results of the event
pose on the nation as a whole. It is important to note that this
research tries to explain the variation in the UK’s currency
value during a specified time. The study intends to contribute
to the literature on determining exchange rates and to mark
or signify the importance of political announcement or
outcomes on the GBP’s currency exchange rate.
2 Literature Review
Research by Garfinkel, Glazer and Lee (Frenkel 1981) show
that events or announcements have a significant impact on
exchange rates. In their research, (Frenkel 1981) they set out
to find whether unexpected election results could shed some
light on the unexpected variation in foreign exchange rates.
They observed the magnitude of forecast errors on currency
futures near election times via the use of event studies. They
uncovered that some, yet not all elections, can be an
important element, which leads to exchange rate volatility.
According to their research, exchange rate markets are not
indifferent to the candidates or parties for which the elections
are held. This can be explained by the different economic
policies the opposing sides may adopt after the win. Moreover, currency market volatility was low when the markets
had foreseen the election outcome. This would suggest that
the markets had already reacted to the news once it was
available and had already prepared for the outcome from the
election. This study discusses the element of surprise results;
however, will not include it in the model for observing
abnormal performance.
Kearns and Manners (Galati and Ho 2003) observed the
impact of monetary policy on the exchange rates of four
countries. Through using intraday data and a short event
window, they found that the impact of the monetary policy
changes was reflected on the stocks almost instantaneously.
During their research, they also discovered that the monetary
policy could only account for 10–20% of the total change in
the exchange rates within the window period. This suggests
that there are other factors that were not accounted for in
their research, which would have caused the currency
volatility. Markets react to news. News can account for up to
30% in currency variation. This news can lead to currency
movements, but trading can further lead to an increase in
volatility. Positive feedback trading can affect currency
values leading to higher volatilities; in 2005, Osler provided
evidence on how stop-loss orders lead to self-generated
movement in prices, when the orders either purchased or
shorted currencies depending on whether the market rose or
fell. This hedging mechanism, though protecting investors
can lead to excess supply or demand for the currency in the
market, which in turn further damages or inflates the price of
a currency.
In 2006, Kearns and Manners (Galati and Ho 2003)
showed that monetary policy decisions are well anticipated
by the market, hence their impact should already be
228
J. Janjusevic and W. Chegeni
employs different methodologies for a better assessment of
the results and for comparison, both models are revisited in
the literature review. Additionally, the results are compared
for the two models for which they will both undergo a
robustness test. Moreover, this research will highlight any
limitations with the research and assess the validity of the
model that is being applied.
Even though numerous event studies have been carried
out on developed nations, there has not been an extensive
amount of research done on political outcomes and their
effect on foreign exchange rates in developed economies, as
there are other factors that also have substantial and proven
effects on a country’s exchange rate other than political
event outcomes. Though political events have been referred
to in the past to explain day to day movements in currencies,
they are often circumstantial, and no real assessment has
been carried out to determine the extent to which the events
can explain for the results.
‘Markets like good news. Markets dislike bad news, but
markets hate uncertainty’, (Willis Sparks, 2016, Middle East
Investment Conference). Currency volatility can be brought
on by uncertainty, which in turn leads to economic consequences on trade and other macroeconomic factors. This
paper does not aim to unearth or prove the macroeconomic
issues that may be brought on by a depreciating currency but
will shed some light on why a currency may rapidly
depreciate following news that leaves a cloud of doubt and
uncertainty as to what the future may hold for an economy.
It is also expected that developing or emerging nations are
most likely to suffer from currency exchange volatility;
however, this research hopes to show that even developed
nations are prone to variations in exchange rates due to
political changes or instability.
The Brexit vote was a political event; however, political
events generally come hand in hand with macroeconomic
implications. This research’s main objective is not to analyze
the long-lasting effects of the referendum but will comment
on the macroeconomic factors which are the cause of
uncertainty. This study will primarily focus on the event
itself rather than the implications that the results of the event
pose on the nation as a whole. It is important to note that this
research tries to explain the variation in the UK’s currency
value during a specified time. The study intends to contribute
to the literature on determining exchange rates and to mark
or signify the importance of political announcement or
outcomes on the GBP’s currency exchange rate.
2 Literature Review
Research by Garfinkel, Glazer and Lee (Frenkel 1981) show
that events or announcements have a significant impact on
exchange rates. In their research, (Frenkel 1981) they set out
to find whether unexpected election results could shed some
light on the unexpected variation in foreign exchange rates.
They observed the magnitude of forecast errors on currency
futures near election times via the use of event studies. They
uncovered that some, yet not all elections, can be an
important element, which leads to exchange rate volatility.
According to their research, exchange rate markets are not
indifferent to the candidates or parties for which the elections
are held. This can be explained by the different economic
policies the opposing sides may adopt after the win. Moreover, currency market volatility was low when the markets
had foreseen the election outcome. This would suggest that
the markets had already reacted to the news once it was
available and had already prepared for the outcome from the
election. This study discusses the element of surprise results;
however, will not include it in the model for observing
abnormal performance.
Kearns and Manners (Galati and Ho 2003) observed the
impact of monetary policy on the exchange rates of four
countries. Through using intraday data and a short event
window, they found that the impact of the monetary policy
changes was reflected on the stocks almost instantaneously.
During their research, they also discovered that the monetary
policy could only account for 10–20% of the total change in
the exchange rates within the window period. This suggests
that there are other factors that were not accounted for in
their research, which would have caused the currency
volatility. Markets react to news. News can account for up to
30% in currency variation. This news can lead to currency
movements, but trading can further lead to an increase in
volatility. Positive feedback trading can affect currency
values leading to higher volatilities; in 2005, Osler provided
evidence on how stop-loss orders lead to self-generated
movement in prices, when the orders either purchased or
shorted currencies depending on whether the market rose or
fell. This hedging mechanism, though protecting investors
can lead to excess supply or demand for the currency in the
market, which in turn further damages or inflates the price of
a currency.
In 2006, Kearns and Manners (Galati and Ho 2003)
showed that monetary policy decisions are well anticipated
by the market, hence their impact should already be
228
J. Janjusevic and W. Chegeni