Political Uncertainty and Sentiment: Evidence From the Impact of Brexit on Financial Markets
35 Pages Posted: 23 Jul 2020
Date Written: June 30, 2020
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
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