event. Additionally, the month in which a significant drop is
observed is February 2016. This further corroborates the
reason for concern for the data, which was used for the
estimation period.
Another element to be noted is the use of the Euro as the
basis at which the GBP would be assessed against meaning
that the referendum was for leaving the European Union,
which is the domestic economy for the Euro. Hence, it is
possible that the Euro was also affected during the lead time
to the vote and in its anticipation. This element is a limitation
to this research, as this was not evaluated in any capacity.
Another challenge with conducting event studies on currencies is selecting the appropriate market to regress against
the currency of interest to obtain beta. By selecting the major
currencies, there is always the risk of intercorrelation of
variables. Moreover, the other risk is assessing the value of
the currency as was discussed in the literature review. Which
currency should be used in assessing the value of the currency of interest, and if so how can it be justified. This
research opted to use the Euro but evaluated the currencies
in terms of indices, the Euro index against the GBP index
due to recommendations from past literature. Though this
was not a conventional way to assess currencies, the index
approach was more appealing due to specific error reduction.
5 Macroeconomic Implications
The EU referendum did not only affect the GBP but also
other effects from this event were witnessed in different asset
markets globally. Significant drops in Tokyo, New York and
London stock markets were observed, with the Dow Jones
industrial average tumbling 611 points, European stocks
dropping 8.6% and British stocks falling 3.6%. Investors
quickly took refuge in safer investments following this
downward trend in many markets. The result from the referendum postured a prospect of continued anxiety in global
markets for investors as they failed to accurately infer the
implications of what had happened. Investors and economists believed that markets want to know facts and are
anxious about the unknown due to underlying potential risks
(Financial Times 2016).
Though the GBP has stabilized against the USD and EUR
there have been some noteworthy macroeconomic changes
that have already come into effect within the UK. Inflation
has been on the climb with it rising to 2.5% in 2018 from a
0.5% in 2016, which outpaced average wages, hence
squeezing living standards in the UK. Furthermore, growth
has been hindered since the referendum with GDP figures
slowing down in 2017. A good indicator of growth performance is comparing the UK’s growth against the growth of
other G7 nations. The UK was comfortably growing at an
average rate of 2%, which has dropped to 1.4%, whilst the
remaining G7 nations have continued to grow at a faster rate,
surpassing that of the UK.
The EU referendum vote was the kick-off for complicated
and politically tense negotiations between the UK and the
twenty-seven members of the EU. Despite the macroeconomic changes, the referendum triggered a central element to
the economy and the negotiations will be the future of the
common market as the UK sales to the common market
represent almost 50% of its total exports. A major assumption which has been subject to various academic literature is
disruption to trade. These studies assumed that the British
economy would be subjected to long-lasting damaging
effects should it choose to leave the EU. Despite the ominous
literature, the leave side managed to campaign against it
claiming that they would manage to strike a better deal
during the negotiation period. Some EU prominent leaders
such as the German Chancellor Angela Merkel, clearly stated that the European Union would not offer a rewarding
deal to the UK for leaving as it will encourage other discontented members to pursue the same path. This suggests
that the trade element will be one that will definitely be
affected, which may further affect the British Pound. This
section of the study focusses on the elements which are most
likely to be affected by the referendum result and how they
are responsible for the level of uncertainty that is currently
present in many markets inside and outside of Britain.
It is important to note that the result of the EU referendum
vote of 2016 was not the reason for the decline of the GBP yet
was more of a trigger. The Brexit result triggered the initial
market reaction that would be expected due to the underlying
macroeconomic implications that come hand in hand with the
UK leaving the EU. This made one thing abundantly clear, to
some degree, that the trade between the EU and the UK
would be affected. As trade plays a significant part in an
economy’s prosperity, the currency markets would regard
trade in jeopardy following the EU referendum result.
The depreciation of a currency generally signals negative
information about the state of a currency’s strength. Hence, a
large depreciation can lead to lower market confidence,
which may further drive down the value of the currency.
Prior to the election, some economists and investors had
predicted a considerable depreciation in the Pound, should
the UK vote to leave the EU. The theory behind this
assumption was that leaving the EU would create an environment of uncertainty, which inherently affects the demand
of the pound as investors shy away from investments in the
UK.
Moreover, this uncertainty would spill over to the trading
arena meaning that the extent to which trading conditions
would change are not known. This further would discourage
investment in the UK, which could lead to a lower economic
growth and possibly lower interest rates. Lower interest rates
would further reduce the demand for the pound by making
236
J. Janjusevic and W. Chegeni
observed is February 2016. This further corroborates the
reason for concern for the data, which was used for the
estimation period.
Another element to be noted is the use of the Euro as the
basis at which the GBP would be assessed against meaning
that the referendum was for leaving the European Union,
which is the domestic economy for the Euro. Hence, it is
possible that the Euro was also affected during the lead time
to the vote and in its anticipation. This element is a limitation
to this research, as this was not evaluated in any capacity.
Another challenge with conducting event studies on currencies is selecting the appropriate market to regress against
the currency of interest to obtain beta. By selecting the major
currencies, there is always the risk of intercorrelation of
variables. Moreover, the other risk is assessing the value of
the currency as was discussed in the literature review. Which
currency should be used in assessing the value of the currency of interest, and if so how can it be justified. This
research opted to use the Euro but evaluated the currencies
in terms of indices, the Euro index against the GBP index
due to recommendations from past literature. Though this
was not a conventional way to assess currencies, the index
approach was more appealing due to specific error reduction.
5 Macroeconomic Implications
The EU referendum did not only affect the GBP but also
other effects from this event were witnessed in different asset
markets globally. Significant drops in Tokyo, New York and
London stock markets were observed, with the Dow Jones
industrial average tumbling 611 points, European stocks
dropping 8.6% and British stocks falling 3.6%. Investors
quickly took refuge in safer investments following this
downward trend in many markets. The result from the referendum postured a prospect of continued anxiety in global
markets for investors as they failed to accurately infer the
implications of what had happened. Investors and economists believed that markets want to know facts and are
anxious about the unknown due to underlying potential risks
(Financial Times 2016).
Though the GBP has stabilized against the USD and EUR
there have been some noteworthy macroeconomic changes
that have already come into effect within the UK. Inflation
has been on the climb with it rising to 2.5% in 2018 from a
0.5% in 2016, which outpaced average wages, hence
squeezing living standards in the UK. Furthermore, growth
has been hindered since the referendum with GDP figures
slowing down in 2017. A good indicator of growth performance is comparing the UK’s growth against the growth of
other G7 nations. The UK was comfortably growing at an
average rate of 2%, which has dropped to 1.4%, whilst the
remaining G7 nations have continued to grow at a faster rate,
surpassing that of the UK.
The EU referendum vote was the kick-off for complicated
and politically tense negotiations between the UK and the
twenty-seven members of the EU. Despite the macroeconomic changes, the referendum triggered a central element to
the economy and the negotiations will be the future of the
common market as the UK sales to the common market
represent almost 50% of its total exports. A major assumption which has been subject to various academic literature is
disruption to trade. These studies assumed that the British
economy would be subjected to long-lasting damaging
effects should it choose to leave the EU. Despite the ominous
literature, the leave side managed to campaign against it
claiming that they would manage to strike a better deal
during the negotiation period. Some EU prominent leaders
such as the German Chancellor Angela Merkel, clearly stated that the European Union would not offer a rewarding
deal to the UK for leaving as it will encourage other discontented members to pursue the same path. This suggests
that the trade element will be one that will definitely be
affected, which may further affect the British Pound. This
section of the study focusses on the elements which are most
likely to be affected by the referendum result and how they
are responsible for the level of uncertainty that is currently
present in many markets inside and outside of Britain.
It is important to note that the result of the EU referendum
vote of 2016 was not the reason for the decline of the GBP yet
was more of a trigger. The Brexit result triggered the initial
market reaction that would be expected due to the underlying
macroeconomic implications that come hand in hand with the
UK leaving the EU. This made one thing abundantly clear, to
some degree, that the trade between the EU and the UK
would be affected. As trade plays a significant part in an
economy’s prosperity, the currency markets would regard
trade in jeopardy following the EU referendum result.
The depreciation of a currency generally signals negative
information about the state of a currency’s strength. Hence, a
large depreciation can lead to lower market confidence,
which may further drive down the value of the currency.
Prior to the election, some economists and investors had
predicted a considerable depreciation in the Pound, should
the UK vote to leave the EU. The theory behind this
assumption was that leaving the EU would create an environment of uncertainty, which inherently affects the demand
of the pound as investors shy away from investments in the
UK.
Moreover, this uncertainty would spill over to the trading
arena meaning that the extent to which trading conditions
would change are not known. This further would discourage
investment in the UK, which could lead to a lower economic
growth and possibly lower interest rates. Lower interest rates
would further reduce the demand for the pound by making
236
J. Janjusevic and W. Chegeni