Political Uncertainty and Sentiment: Evidence From the Impact of Brexit on Financial Markets

35 Pages Posted: 23 Jul 2020

See all articles by Robert Hudson

Robert Hudson

Hull University Business School (HUBS)

Andrew Urquhart

ICMA Centre, Henley Business School

Hanxiong Zhang

Sheffield University Management School

Date Written: June 30, 2020

Abstract

This paper investigates the impact of Brexit events on the behaviour of 34 financial indices from 1st January 2012 to 26th April 2017. Our focus is to evaluate whether the impact of Brexit on financial markets is consistent with rational asset pricing models. The empirical research uses a time-series GARCH framework with the conditional variance as proxies for market risk, and two typical event study approaches (the mean-adjusted-return approach and the market model approach). For robustness, we select important Brexit events using both criteria established in the prior literature on sentiment and also structural breaks in the data. Our results indicate that the event day return effect is partly justified by the risk and/or the risk premium on that day.

Keywords: Event Study, EU Referendum, Risk, Investor Sentiment, Market Efficiency, GARCH

JEL Classification: G10, G11, G12, G14

Suggested Citation

Hudson, Robert and Urquhart, Andrew and Zhang, Hanxiong, Political Uncertainty and Sentiment: Evidence From the Impact of Brexit on Financial Markets (June 30, 2020). Available at SSRN: https://ssrn.com/abstract=3638967 or http://dx.doi.org/10.2139/ssrn.3638967

Robert Hudson

Hull University Business School (HUBS) ( email )

Hull, HU6 7RX
United Kingdom

Andrew Urquhart (Contact Author)

ICMA Centre, Henley Business School ( email )

University of Reading
Whiteknights
Reading, Berkshire RG6 6BA
United Kingdom

Hanxiong Zhang

Sheffield University Management School ( email )

University of Sheffield
Conduit Road
Sheffield, S10 1FL
United Kingdom

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