The Effects of Brexit on the Pound: Towards a Currency Crisis?

14 Pages Posted: 24 Jul 2017

See all articles by Vasilios Plakandaras

Vasilios Plakandaras

Democritus University of Thrace

Rangan Gupta

University of Pretoria - Department of Economics

Mark E. Wohar

University of Nebraska at Omaha

Date Written: May 21, 2017

Abstract

The decision of the United Kingdom to leave the European Union (Brexit) after 43 years caused turmoil in exchange rate and global stock markets. More specifically, the pound relative to the dollar has lost close to 15 percent of its value in the weeks after the decision for Brexit. In this paper we attempt to examine whether this sudden depreciation of the (pound-dollar) exchange rate is the reaction of market participants to the Brexit or whether the exodus of U.K. for the EU had little impact on the exchange rate. In doing so, we train linear and nonlinear econometric and machine learning models and evaluate out-of-sample forecasts of the exchange rate and its realized volatility in the pre- and post-Brexit period. We quantify uncertainty caused by the Brexit according to an index based on news related to economic uncertainty. We argue that in daily forecasting horizon our models adhere closely to the evolution of the exchange rate and that most of the depreciation is based on Brexit.

Keywords: Brexit, Economic Uncertainty, Machine Learning

JEL Classification: F31, F37

Suggested Citation

Plakandaras, Vasilios and Gupta, Rangan and Wohar, Mark E., The Effects of Brexit on the Pound: Towards a Currency Crisis? (May 21, 2017). Available at SSRN: https://ssrn.com/abstract=3006489 or http://dx.doi.org/10.2139/ssrn.3006489

Vasilios Plakandaras (Contact Author)

Democritus University of Thrace ( email )

University Campus
Komotini, 69100
Greece

Rangan Gupta

University of Pretoria - Department of Economics ( email )

Lynnwood Road
Hillcrest
Pretoria, 0002
South Africa

Mark E. Wohar

University of Nebraska at Omaha ( email )

Department of Economics
6708 Pine Street MH 332S
Omaha, NE 68182
United States
402-554-3712 (Phone)
402-554-2853 (Fax)

HOME PAGE: http://cba.unomaha.edu/faculty/mwohar/WEB/homepage.html

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