Effects of Brexit on the financial markets - An empirical study using event study methodology and GARCH models

Abstract

In the current empirical analysis, I investigated whether Brexit was a surprise for financial markets. I studied evidence from currency and stock markets in the UK and EU, using event study methodology and GARCH models. In the first part of this study, I observed that the majority of abnormal returns before the Brexit are positive and the abnormal returns on the event day are negative. Therefore, Brexit vote came as a surprise for financial markets. In the second part, my findings based on the ARCH/GARCH model indicated that there is a heteroscedasticity in the returns of the stock markets. Furthermore, using GARCH (1, 1) model with dummy variable and studying the volatility clustering in the stock markets I concluded that the uncertainty before the Brexit led to increase in the volatility in this period. However realizing the outcome of the referendum and countermeasures taken by the UK government led to decrease in the volatility after the Brexit.