The British Pound on Brexit Night: A Natural Experiment of Market Efficiency and Real-Time Predictability

38 Pages Posted: 29 Mar 2017  

Ke Wu

ETH Zurich - Department of Management, Technology, and Economics (D-MTEC)

Spencer Wheatley

ETH Zurich

Didier Sornette

Swiss Finance Institute; ETH Zürich - Department of Management, Technology, and Economics (D-MTEC)

Date Written: March 24, 2017

Abstract

Exploiting the near-experimental conditions provided by the British Pound market in US Dollars during the Brexit vote of June 23rd, 2016, we unearth a major challenge to the Efficient Market Hypothesis. With a single factor of prior polling information, we show that the Brexit result could have been predicted with high confidence under realistic conditions, knowing only the first 20 of all 382 local voting results. However, the market was severely delayed in reflecting this fundamental information. This collective failure indicates both generic inefficiency and a specific inertia/durable bias in the market similar to herding during bubbles.

Keywords: Brexit, efficient market hypothesis, response function, one factor model, prediction, market failure

JEL Classification: C51, C53, C54, C93, D72, D83, G17

Suggested Citation

Wu, Ke and Wheatley, Spencer and Sornette, Didier, The British Pound on Brexit Night: A Natural Experiment of Market Efficiency and Real-Time Predictability (March 24, 2017). Swiss Finance Institute Research Paper No. 17-12. Available at SSRN: https://ssrn.com/abstract=2940173 or http://dx.doi.org/10.2139/ssrn.2940173

Ke Wu

ETH Zurich - Department of Management, Technology, and Economics (D-MTEC) ( email )

Scheuchzerstrasse 7
Zürich, Zurich 8092
Switzerland
0446322445 (Phone)

Spencer Wheatley

ETH Zurich ( email )

Rämistrasse 101
ZUE F7
Zürich, 8092
Switzerland

Didier Sornette (Contact Author)

Swiss Finance Institute ( email )

c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Switzerland

ETH Zürich - Department of Management, Technology, and Economics (D-MTEC) ( email )

Scheuchzerstrasse 7
Zurich, ZURICH CH-8092
Switzerland
41446328917 (Phone)
41446321914 (Fax)

HOME PAGE: http://www.er.ethz.ch/

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