Abstract
Using event-study techniques, we investigate the impact of Brexit-related events on the spot exchange rate of the British pound against the euro and the US dollar. We want to find out whether Brexit-related news, including the Brexit referendum itself, has an impact on British pound exchange rates. By splitting our Brexit-related events into ‘good’ Brexit news and ‘bad’ Brexit news, we find that Brexit news has an impact on British pound exchange rates. Bad Brexit news is associated with a depreciation of the British pound against the euro and the US dollar whereas ‘good’ Brexit news appreciates the Pound against the euro. Furthermore, our empirical results suggest that market participants display a delayed reaction to bad Brexit news. As the referendum has clearly a significant impact on both British pound/euro and British pound/US dollar exchange rate volatility, the impact of Brexit news is only for the British pound/euro exchange rate volatility measurable. Besides the asymmetric volatility pattern towards positive and negative shocks in general, we find that the statistically significance and the magnitude of the impact of good Brexit news is higher than these of bad Brexit news. Concerning the British pound/US dollar exchange rate volatility, our results display a weak presence of volatility asymmetry in terms of shocks and good/bad Brexit news, respectively.
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Notes
See Appendix 1 Table 19.
Note, that similar events are not necessarily classified into the same news group.
Our empirical results also suggest that bad Brexit news, excluding the announcement of the referendum result, has a statistically significant impact on the spot exchange rate of the British pound against the euro. Hence, we find that other bad Brexit-related events, excluding the referendum, also affected the British pound/euro exchange rate. Results are set out in Table 20 in Appendix 2.
Here, we also find that bad Brexit-related events, excluding the Brexit referendum, have a statistically significant impact on the spot exchange rate of the British pound against the US dollar. The results are reported in Table 21 in Appendix 2.
Like ARMA models, GARCH models are very sensitive to outliers, since outlying values bias the estimation repeatedly due to the autoregressive progress. Since the British pound depreciated sharply against the euro following the Brexit referendum, we implement in the variance equation the referendum dummy variable, which absorbs the external shock of the vote. So Referendumtconsists of zeros except for the 24 June 2016, at which it takes the value one. To avoid double counting, we replace the value one at the 24 June 2016 in the Brexitt dummy variable with a zero. The stark depreciation of the British pound against the US dollar after the vote persists over two working days. Thus, vis-à-vis the British pound/US dollar exchange rate volatility, the referendum dummy takes the value one on the 24 and 27 June 2016.
In addition, this finding is consistent with the results of Section 3.2.1 (see Table 3), where the coefficient of good Brexit news has a higher significance level than the coefficient of bad Brexit news.
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Acknowledgements
This paper is part of EIIW research funded by the Deutsche Bundesbank. While the authors gratefully acknowledge funding from the Deutsche Bundesbank within the project “The Influence of Brexit on the EU28: Banking and Capital Market Adjustments as well as Direct Investment Dynamics in the Eurozone and other EU Countries”, opinions expressed within represent those of the authors and do not reflect the views of the Deutsche Bundesbank or its staff. We gratefully acknowledge editorial assistance by David Hanrahan (EIIW), data assistance by Lev Nazarov and Valeryia Siarheyeva, comments by Prof. Dr. Andre Jungmittag, Frankfurt University of Applied Sciences and IPTS Sevilla, Prof. Dr. Frank Bohn, Radboud University, Prof. Dr. Volker Clausen, University of Duisburg-Essen, Tobias Gruhle, Johannes Gutenberg-University, EIIW seminar participants and participants of the 14th CEUS Workshop on European Economics. Comments from Alexandra Dumitru, Rabobank, Manfred Kremer, European Central Bank, Prof. Dr. Paul J.J. Welfens, University of Wuppertal, Andrew Mullineux, University of Birmingham, and Christopher Thiem, University of Duisburg-Essen, at the EIIW workshop, March 16, 2018, are appreciated. The usual disclaimer applies.
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Korus, A., Celebi, K. The impact of Brexit news on British pound exchange rates. Int Econ Econ Policy 16, 161–192 (2019). https://doi.org/10.1007/s10368-018-00423-0
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DOI: https://doi.org/10.1007/s10368-018-00423-0