Was there a “bubble for Remain” on the night of the EU referendum?

Abstract

We study the behaviour of the Betfair betting market and the sterling/dollar exchange rate (futures price) during 24 June 2016, the night of the EU referendum. We investigate how the two markets responded to the announcement of the voting results. We employ a Bayesian updating methodology to update prior opinion about the likelihood of the final outcome of the vote. We then relate the voting model to the real time evolution of the market determined prices as results are announced. We find that both markets appear to be inefficient in absorbing the new information contained in vote outcomes by around 3 hours. The betting market is apparently slightly less inefficient than the FX market. Our results are robust to the choice of hyper-parameters in our prior. Indeed we find no plausible values that lead to behaviour consistent with price action from the night. It appears that investors simply could not believe the UK was voting to leave the EU.

Keywords: Political risk, EU referendum, Prediction markets, Efficient Markets Hypothesis, Bayesian methods, Exchange rates

JEL Classification: C53, G12, G14, G15, G17