the GBP a less attractive investment. Another concern that
could have resulted in a deprecating Pound was the UK
current account. The UK has a considerable current account
deficit, in which net capital inflows primarily finance. The
reduction of these inflows would mean that the GBP would
have to decline to offset the imbalance. UK trade has become
a subject of much speculation and area for future research,
where most economists believe that the UK will still be
worse off regardless how the negotiations play out. The UK
is currently divided by two opposing concepts: a ‘soft’ or
‘hard’ Brexit. A soft Brexit refers to the UK staying closely
aligned with the EU by remaining in the EU’s single market
and customs union. A hard Brexit, on the other hand, rejects
the idea of staying aligned with the EU’s regulations and
tariffs. Trade is likely to be affected depending on which side
the negotiations will favour.
Furthermore, the UK was a gateway to the European
market, foreign companies could invest in the UK and
manage to trade in Europe without facing tariffs or other
barriers to trade. Leaving the EU may encourage foreign
investment in other EU nations so that they can still have
unhindered access to the larger market. Foreign Direct
Investments (FDI) are an integral part of the UK economy,
following the wake of the Brexit referendum they are
expected to reduce significantly. A study conducted by
Dhingra, Ottaviano, Sampson and Van Reenen (2016) analyzed the effects of Brexit on FDI in the UK. The researchers
estimate that FDI inflows are likely to reduce by approximately 22%. The estimate is considerably high and such a
loss could potentially damage the productivity in the UK and
reduce real income significantly.
The director of the Center for Economic Performance at
the London School of Economics, John Van Reenen commented on the uncertainty and how it will further affect the
business environment in the UK. He describes a
‘rabbit-in-the-headlights’ state, where businesses are reluctant to undertake new investments or make new decisions
due to the uncertainty of the future. This will instantaneously
lower investment activity, which in turn affects hiring and
ultimately slows down the growth of the economy.
The other concern, which investors have had, was that the
Pound had already started to weaken in anticipation of the
upcoming referendum. This would suggest that the market
had already considered the possible decline that the referendum would have caused. Nevertheless, the EU referendum
incited a cloud of uncertainty which markets are generally
not fond of. Leaving the EU, was the unknown; how trade
and investments would be affected were elements which
could not be quantified. The markets, therefore, reacted
negatively to this uncertainty, which led to a steep plummet
in the GBP’s value.
The aforementioned factors all contribute to reasons why
the GBP fell; however, the consequences of the EU
referendum will depend on the terms in which the UK
departs the EU and the economic climate during that time. It
is quite possible that a further drop in the GBP can be
observed at the time of departure; however, there should be
less uncertainty in the market once the negotiations regarding Britain’s exit are finalized. Some academics believe that
the EU referendum vote will have a domino effect on other
European states, which poses a risk of another European
crisis or further fragmentation from the common market. The
question is whether the European integration can survive
another crisis or would another event see it fall apart.
As an immediate countermeasure to the trade arena, the
UK would need to focus on securing better exit deals with
the EU for their strategically imperative sectors to continually support and positively influence investors, businesses
and economic growth. With negotiations at hand, the UK
may have to make trade-offs and forego the trading agreements for some sectors so as to ensure it supports more
important ones.
This section was dedicated to assessing the macroeconomic implications, which indicate a negative environment
should the UK exit the EU. This sheds some light on the
cause for uncertainty and subsequently the reason why GBP
reacted negatively to the EU referendum result.
6 Conclusion
This research aimed to quantify the cumulative abnormal
returns using two methodological approaches for a specific
event from which significant abnormal returns were
obtained. The research managed to quantify the abnormal
returns, which were observed following the EU referendum
result. This single event does not prove that developed
nation’s currencies respond to political events (and their
underlying factors), yet it does strongly indicate that
uncertainty can drastically affect the value of a currency. In
this example, the GBP, which is well regarded to be one of
the strongest and most stable currencies globally, declined
heavily after the announcement that EU referendum vote
was in favour of the UK leaving the EU. Currency markets
are extremely sensitive, especially with the interconnectedness of today’s world; it is important that the economy takes
measures to secure the stability of their currency value
especially when there are many different variables that can
affect them.
The EU referendum hosted an environment of uncertainty, especially about trade, which was undoubtedly been a
pivotal factor which led to a depreciated Pound. Other
macroeconomic implications are also quite dire, and the
markets took this into account. The referendum vote was the
initial step, and the currency market reacted to this, yet, it is
unknown what agreements for trade and other essentials will
The Effect of the EU Referendum on the GBP: Evidence From Brexit
237
could have resulted in a deprecating Pound was the UK
current account. The UK has a considerable current account
deficit, in which net capital inflows primarily finance. The
reduction of these inflows would mean that the GBP would
have to decline to offset the imbalance. UK trade has become
a subject of much speculation and area for future research,
where most economists believe that the UK will still be
worse off regardless how the negotiations play out. The UK
is currently divided by two opposing concepts: a ‘soft’ or
‘hard’ Brexit. A soft Brexit refers to the UK staying closely
aligned with the EU by remaining in the EU’s single market
and customs union. A hard Brexit, on the other hand, rejects
the idea of staying aligned with the EU’s regulations and
tariffs. Trade is likely to be affected depending on which side
the negotiations will favour.
Furthermore, the UK was a gateway to the European
market, foreign companies could invest in the UK and
manage to trade in Europe without facing tariffs or other
barriers to trade. Leaving the EU may encourage foreign
investment in other EU nations so that they can still have
unhindered access to the larger market. Foreign Direct
Investments (FDI) are an integral part of the UK economy,
following the wake of the Brexit referendum they are
expected to reduce significantly. A study conducted by
Dhingra, Ottaviano, Sampson and Van Reenen (2016) analyzed the effects of Brexit on FDI in the UK. The researchers
estimate that FDI inflows are likely to reduce by approximately 22%. The estimate is considerably high and such a
loss could potentially damage the productivity in the UK and
reduce real income significantly.
The director of the Center for Economic Performance at
the London School of Economics, John Van Reenen commented on the uncertainty and how it will further affect the
business environment in the UK. He describes a
‘rabbit-in-the-headlights’ state, where businesses are reluctant to undertake new investments or make new decisions
due to the uncertainty of the future. This will instantaneously
lower investment activity, which in turn affects hiring and
ultimately slows down the growth of the economy.
The other concern, which investors have had, was that the
Pound had already started to weaken in anticipation of the
upcoming referendum. This would suggest that the market
had already considered the possible decline that the referendum would have caused. Nevertheless, the EU referendum
incited a cloud of uncertainty which markets are generally
not fond of. Leaving the EU, was the unknown; how trade
and investments would be affected were elements which
could not be quantified. The markets, therefore, reacted
negatively to this uncertainty, which led to a steep plummet
in the GBP’s value.
The aforementioned factors all contribute to reasons why
the GBP fell; however, the consequences of the EU
referendum will depend on the terms in which the UK
departs the EU and the economic climate during that time. It
is quite possible that a further drop in the GBP can be
observed at the time of departure; however, there should be
less uncertainty in the market once the negotiations regarding Britain’s exit are finalized. Some academics believe that
the EU referendum vote will have a domino effect on other
European states, which poses a risk of another European
crisis or further fragmentation from the common market. The
question is whether the European integration can survive
another crisis or would another event see it fall apart.
As an immediate countermeasure to the trade arena, the
UK would need to focus on securing better exit deals with
the EU for their strategically imperative sectors to continually support and positively influence investors, businesses
and economic growth. With negotiations at hand, the UK
may have to make trade-offs and forego the trading agreements for some sectors so as to ensure it supports more
important ones.
This section was dedicated to assessing the macroeconomic implications, which indicate a negative environment
should the UK exit the EU. This sheds some light on the
cause for uncertainty and subsequently the reason why GBP
reacted negatively to the EU referendum result.
6 Conclusion
This research aimed to quantify the cumulative abnormal
returns using two methodological approaches for a specific
event from which significant abnormal returns were
obtained. The research managed to quantify the abnormal
returns, which were observed following the EU referendum
result. This single event does not prove that developed
nation’s currencies respond to political events (and their
underlying factors), yet it does strongly indicate that
uncertainty can drastically affect the value of a currency. In
this example, the GBP, which is well regarded to be one of
the strongest and most stable currencies globally, declined
heavily after the announcement that EU referendum vote
was in favour of the UK leaving the EU. Currency markets
are extremely sensitive, especially with the interconnectedness of today’s world; it is important that the economy takes
measures to secure the stability of their currency value
especially when there are many different variables that can
affect them.
The EU referendum hosted an environment of uncertainty, especially about trade, which was undoubtedly been a
pivotal factor which led to a depreciated Pound. Other
macroeconomic implications are also quite dire, and the
markets took this into account. The referendum vote was the
initial step, and the currency market reacted to this, yet, it is
unknown what agreements for trade and other essentials will
The Effect of the EU Referendum on the GBP: Evidence From Brexit
237