Expectations and Financial Markets: Lessons from Brexit

The Financial Review Forthcoming

41 Pages Posted: 25 Nov 2016 Last revised: 29 Dec 2020

See all articles by Chen Gu

Chen Gu

Shanghai Business School - Research Center of Finance

Ann Marie Hibbert

West Virginia University - John Chambers College of Business and Economics, Department of Finance

Date Written: July 1, 20

Abstract

We use the setting of Brexit to investigate how financial markets react to news about
political events. We provide robust evidence that political risk is priced by equity markets globally.
Furthermore, commodity, government bonds and currency markets are also affected by political
uncertainty. However, our intraday results reveal that markets respond very quickly to political
news as changes in the probability of Brexit was impounded into equity prices within five minutes.
Our findings also show that investor attention significantly influences the link between the
market’s expectations of political events and asset prices.

Keywords: Brexit; political risk; financial markets; market uncertainty; volatility risk; investor attention

JEL Classification: E6, G1, G13 ,G14, H0

Suggested Citation

Gu, Chen and Hibbert, Ann Marie, Expectations and Financial Markets: Lessons from Brexit (July 1, 20). The Financial Review Forthcoming, Available at SSRN: https://ssrn.com/abstract=2874646 or http://dx.doi.org/10.2139/ssrn.2874646

Chen Gu (Contact Author)

Shanghai Business School - Research Center of Finance ( email )

Shanghai
China

Ann Marie Hibbert

West Virginia University - John Chambers College of Business and Economics, Department of Finance ( email )

Morgantown, WV 26506
United States

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