Mind the (trade) gap! How costly is erecting barriers to trade?

Abstract

Brexit referendum disrupted global trade: UK's exchange with EU and numerous third countries would suffer. Relative stock prices reacted accordingly with the damage greater and longer-lasting for the UK than the block. UK-focused manufacturing fared worst in both regions. UK's EU-exposed services firms were also impacted – the market correctly expected December 2020 ''no-deal'' outcome for that sector. Third-country exposure attenuated the shock's impact on EU but not UK companies. Consequently, the UK zone factor underperformed the old-EU one by 20 pp between 2016 and 2019. Brexit exposure high-low portfolio explains 70% of the time-series variation in this underperformance. Overall, the results showcase impact of trade de-liberalization on firm and country business risk.

Keywords: Brexit, Political Uncertainty Risk, Stock Returns

JEL Classification: G12, G14, F15