The Effect of the EU Referendum on the GBP: Evidence From Brexit

The UK not being part of the EU has major implications on the nation’s economy, which ultimately affected the GBP’s exchange rate. In 2016, the GBP hit a 31-year low against the dollar following the steady plummet in the wake of the Brexit. As the Brexit was an isolated event, which has substantial implications on the country’s currency exchange, through an event-study, the extent to which the currency exchange experienced volatility due to this event can be determined. This research will focus on an isolated event, which will be used to determine the extent to which the GBP’s exchange rate was affected by Brexit. Using the event study methodology and two different models: the market model and the mean average return model, this research estimates the abnormal returns for the EU referendum event. Coupled with macroeconomic factors, which are implied by the referendum, the research investigates the potential causes for currency market uncertainty within the UK. As there are not many studies which cover the effects of political announcements in developed economies, this study provides some insight on how a developed nation’s currency can be affected by unexpected political announcements and news, with a specific focus on the Brexit vote outcome.