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Impact of Brexit on Financial Markets
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Impact of Brexit on Financial Markets

A special issue of International Journal of Financial Studies (ISSN 2227-7072).

Deadline for manuscript submissions: closed (31 March 2018) | Viewed by 67589

Special Issue Editors

Prof. Dr. Hong Bo

E-Mail Website
Guest Editor
School of Finance and Management, SOAS University of London, London WC1H 0XG, UK
Interests: financial economics; comparative financial systems; firm investment decisions under uncertainty; capital market imperfections; corporate finance; corporate governance; the Chinese financial system and the Chinese economy
Dr. Ansgar Belke

E-Mail Website
Guest Editor
Ad Personam Jean Monnet Professor for Macroeconomics, Department of Economics, University of Duisburg-Essen, D-45117 Essen, Germany
Interests: international macroeconomics; monetary economics; economic integration; applied econometrics

Special Issue Information

Dear Colleagues,

On 23 June 2016, Britain voted to leave the EU, and the Brexit negotiations between the UK and the EU are currently ongoing.

Participants in the global financial markets are facing great uncertainty about what impact Brexit will have on the European financial system and particularly, the UK financial services sector and its capital markets. It has been argued that Brexit will result in losses of business for the UK-based financial firms, reduction of the human capital pool for the UK financial services sector, loss of competitiveness of the City of London as an international financial centre, and foreseeable higher costs of doing business for both UK and European financial firms due to amendments of regulations and the construction of new financial infrastructures within the EU. 

However, Brexit may also provide new opportunities to the UK financial sector. For example, leaving the EU may set the UK financial sector free to establish business with other markets outside the EU, such as the US, the Middle East, and Asian emerging markets, which may reinforce the importance of the UK financial service sector in the global financial system.

Overall, there are uncertainties surrounding what the new relationship between the UK and the EU will look like after Brexit. Brexit not only challenges practitioners, but also brings about many academic questions, which include, for example: 

(1) Given that the UK is the most representative market-orientated financial system in the EU, whilst the EU is, in general, a banking-orientated one, how will the EU develop its capital markets without the participation of the UK financial sector? 

(2) What will be the changes in the models of risk management for banks, funds, insurance companies, and other asset management firms after Brexit in both the UK and the EU?

(3) How do different elements of the financial system in both the UK and the EU respond to events related to Brexit? These elements include the stock market, the bond market, the derivatives market, the foreign exchange market, and the real estate market, etc.

(4) What are the relocation patterns of corporate headquarters of firms in the financial sector from the UK to the EU countries and to the rest of the world, and vice versa?

(5) How does the labour market re-adjust itself in response to the changes in the demand and the supply of talents in the financial sector in both the UK and the EU, including the pay for executives and employees? 

This Special Issue will provide a good opportunity for researchers in financial economics to examine questions related to the above-mentioned areas. In addition, studies on other subtopics that are relevant to Brexit and its impact on financial systems will also be considered. 

Dr. Hong Bo
Prof. Dr. Ansgar Belke
Guest Editors

Manuscript Submission Information

Manuscripts should be submitted online at www.mdpi.com by registering and logging in to this website. Once you are registered, click here to go to the submission form. Manuscripts can be submitted until the deadline. All submissions that pass pre-check are peer-reviewed. Accepted papers will be published continuously in the journal (as soon as accepted) and will be listed together on the special issue website. Research articles, review articles as well as short communications are invited. For planned papers, a title and short abstract (about 100 words) can be sent to the Editorial Office for announcement on this website.

Submitted manuscripts should not have been published previously, nor be under consideration for publication elsewhere (except conference proceedings papers). All manuscripts are thoroughly refereed through a single-blind peer-review process. A guide for authors and other relevant information for submission of manuscripts is available on the Instructions for Authors page. International Journal of Financial Studies is an international peer-reviewed open access quarterly journal published by MDPI.

Please visit the Instructions for Authors page before submitting a manuscript. The Article Processing Charge (APC) for publication in this open access journal is 1800 CHF (Swiss Francs). Submitted papers should be well formatted and use good English. Authors may use MDPI's English editing service prior to publication or during author revisions.

Keywords

  • Brexit
  • financial system
  • capital market
  • risk management
  • financial services
  • event study
  • relocation of corporate headquarters

Published Papers (7 papers)

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Research

14 pages, 1810 KiB  
Article
Stock Market Reactions to Brexit: Case of Selected CEE and SEE Stock Markets
by Tihana Škrinjarić
Int. J. Financial Stud. 2019, 7(1), 7; https://doi.org/10.3390/ijfs7010007 - 26 Jan 2019
Cited by 12 | Viewed by 6167
Abstract
The debate on the UK leaving the European Union is still hot and ongoing today due to many economic, political, social, and other consequences on many different countries over the world. This paper focuses on the reactions of selected Central and Eastern European [...] Read more.
The debate on the UK leaving the European Union is still hot and ongoing today due to many economic, political, social, and other consequences on many different countries over the world. This paper focuses on the reactions of selected Central and Eastern European (CEE) and South and Eastern European (SEE) stock markets to the Brexit vote on 23 June 2016. Using daily data for the time span from January 2010 until July 2016 and the event study methodology (ESM), the return and volatility series are being tested for significant reactions to the Brexit event. The results indicate mixed results regarding the abnormal cumulative return series, but the volatility series were found to be significantly affected by the mentioned event. This is important for international investors and gives information on the reaction of mentioned markets to big political and economic events in order to tailor international portfolios in a way to hedge from risk. Full article
(This article belongs to the Special Issue Impact of Brexit on Financial Markets)
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22 pages, 887 KiB  
Article
British-European Trade Relations and Brexit: An Empirical Analysis of the Impact of Economic and Financial Uncertainty on Exports
by Ansgar Belke and Sebastian Ptok
Int. J. Financial Stud. 2018, 6(3), 73; https://doi.org/10.3390/ijfs6030073 - 17 Aug 2018
Cited by 6 | Viewed by 7215
Abstract
Brexit, the withdrawal of the United Kingdom (UK) from the European Union (EU), has led to significant exchange rate fluctuations and to uncertainty in financial markets and in UK–EU trade relations. In this article, we use a non-linear model to study how this [...] Read more.
Brexit, the withdrawal of the United Kingdom (UK) from the European Union (EU), has led to significant exchange rate fluctuations and to uncertainty in financial markets and in UK–EU trade relations. In this article, we use a non-linear model to study how this uncertainty affects export companies. Exports tend to react in spurts when exchange rate fluctuations go beyond a band of inaction, referred to here as a “play area”. We apply an algorithm to study this hysteretic relationship with ordinary least squares (OLS) regressions. We examine the export relationship between Europe (Belgium, Germany, France, Italy, and The Netherlands) and the UK. To guarantee the robustness of the results, we estimate a variety of specifications for modeling economic uncertainty: (a) constant uncertainty, (b) exchange rate volatility, (c) volatility in European equity markets, (d) the Treasury Bill EuroDollar Difference (TED-spread), (e) the Economic Policy Uncertainty Index (EPUI), and (f) a combination of exchange rate volatility and the EPUI. Since the results show little evidence of hysteretic effects on British exports, we focus on the European side. The specifications including exchange rate and equity market volatility show a significant effect of hysteresis. Full article
(This article belongs to the Special Issue Impact of Brexit on Financial Markets)
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9 pages, 194 KiB  
Article
The Impact of Brexit on Financial Markets—Taking Stock
by Michaela Hohlmeier and Christian Fahrholz
Int. J. Financial Stud. 2018, 6(3), 65; https://doi.org/10.3390/ijfs6030065 - 16 Jul 2018
Cited by 10 | Viewed by 15942
Abstract
The UK’s withdrawal from the EU will have far-reaching consequences on the European economy. However, the ultimate consequences of Brexit, especially for financial markets, depend on the final agreement, which is still under negotiation. Currently, regulated financial services can be provided across borders [...] Read more.
The UK’s withdrawal from the EU will have far-reaching consequences on the European economy. However, the ultimate consequences of Brexit, especially for financial markets, depend on the final agreement, which is still under negotiation. Currently, regulated financial services can be provided across borders under simplified conditions. Without a special agreement, these EU passports cease to apply for business activities between both jurisdictions after Brexit. The EU third-country regimes for non-EEA companies are too few and too unsecure for intensive relations in trade and services. Knowing that London is the leading global financial center, an adequate agreement needs to be found, to ensure affordable and sufficient financial services for business, investors, and consumers. Unfortunately, it appears almost impossible to find solutions for the often contrary interests and various thematic areas in the remaining negotiating period—a no deal scenario becomes more likely. As a result, market participants have started to adapt structures and processes accordingly, by relocating certain functions to the EU27. Nevertheless, it is up to the negotiators to reach an agreement, which achieves the best possible outcome for all affected parties taking into account the opportunity costs of a failure in present Brexit negotiations. Full article
(This article belongs to the Special Issue Impact of Brexit on Financial Markets)
12 pages, 2784 KiB  
Article
Performance of Exchange Traded Funds during the Brexit Referendum: An Event Study
by Akram Alkhatib and Murad Harasheh
Int. J. Financial Stud. 2018, 6(3), 64; https://doi.org/10.3390/ijfs6030064 - 13 Jul 2018
Cited by 15 | Viewed by 5667
Abstract
In today’s interrelated economies, financial information travel at speed of light to reach investors around the globe. Global financial markets experience regular shocks that transmit negative waves to other equity markets and different asset classes. Given the unique characteristics of exchange-traded funds (ETFs), [...] Read more.
In today’s interrelated economies, financial information travel at speed of light to reach investors around the globe. Global financial markets experience regular shocks that transmit negative waves to other equity markets and different asset classes. Given the unique characteristics of exchange-traded funds (ETFs), this paper examines how different ETFs that are traded on London Financial center reacted to the Brexit event in 23 June 2016. The unexpected referendum result the day after is viewed as the next significant financial event since 2008. The paper employs an event study market model on daily and abnormal returns of the selected ETFs with respect to FTSE 250 around the event date. Contrary to what is expected, the world equities fund experienced significant positive abnormal return on the event day. Emerging markets again proved to be a preferred investment destination in times of financial turmoil; the emerging equities fund gained 3% while enjoying an 11.5% positive significant abnormal returns. The US T-Bond fund recorded a 9% return with a significant 7.2% abnormal return. The gold fund soared as much as 4% as investors seeks refuge from Brexit, and the oil fund retraced 1% amid concerns of slowing global demand. Full article
(This article belongs to the Special Issue Impact of Brexit on Financial Markets)
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19 pages, 960 KiB  
Article
The Impact of Brexit on the Stock Markets of the Greater China Region
by Lucía Morales and Bernadette Andreosso-O’Callaghan
Int. J. Financial Stud. 2018, 6(2), 51; https://doi.org/10.3390/ijfs6020051 - 10 May 2018
Cited by 3 | Viewed by 5213
Abstract
An examination of Brexit and its initial impact on the main stock markets in the Greater China Region (GCR) was conducted using augmented market models that integrate Economic Policy Uncertainty (EPU) and implied volatility (VIX). The results do not seem to align with [...] Read more.
An examination of Brexit and its initial impact on the main stock markets in the Greater China Region (GCR) was conducted using augmented market models that integrate Economic Policy Uncertainty (EPU) and implied volatility (VIX). The results do not seem to align with research in the field that has suggested that the EPU index helps to identify if market participants are reacting to political events. The main research findings suggest that Brexit does not appear to have an impact on the performance of market returns in the region and the influence of economic policy uncertainty in the GCR appears to be insignificant, except for Hong Kong. Overall, China’s stock markets do not seem to be panicking and overreacting to unfolding events in the UK, and market instability in the region appears to be more associated with global and regional events that are better captured by the VIX index. Full article
(This article belongs to the Special Issue Impact of Brexit on Financial Markets)
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21 pages, 2079 KiB  
Article
BREXIT and Foreign Direct Investment: Key Issues and New Empirical Findings
by Paul J. J. Welfens and Fabian J. Baier
Int. J. Financial Stud. 2018, 6(2), 46; https://doi.org/10.3390/ijfs6020046 - 24 Apr 2018
Cited by 25 | Viewed by 15794
Abstract
This contribution takes a new look at the gravity equation model in relation to foreign direct investment (FDI) of leading industrialized countries which presents a useful basis for assessing certain potential impacts arising from BREXIT—the envisaged leaving of the EU by the United [...] Read more.
This contribution takes a new look at the gravity equation model in relation to foreign direct investment (FDI) of leading industrialized countries which presents a useful basis for assessing certain potential impacts arising from BREXIT—the envisaged leaving of the EU by the United Kingdom. The gravity equation estimated subsequently allows one to consider the case of BREXIT and the broader role of EU membership and other variables. Looking at the period from 1985 to 2012 for a dataset which contains 34 OECD (Organisation for Economic Co-operation and Development) countries, Pseudo Poisson Maximum Likelihood (PPML) dyadic fixed estimations take into account a broad set of approaches and variables. Besides the traditional variables of the EU/EU single-market membership of the source country and of the host country, we further consider the role of trade openness as well as corporate tax rates and the ratio of inward FDI stock to total capital stock. The analysis shows that trade openness is a variable which can be largely replaced by the inward FDI stock/capital stock ratio so that gravity FDI modeling with a strong emphasis on trade openness is likely to overstate the role of trade and to understate the role of relative FDI accumulation effects. The implication for BREXIT analysis is that the UK will face three impulses for FDI inflows: (1) leaving the EU single market will strongly reduce FDI inflows; (2) if foreign ownership in UK capital stock should strongly increase in the run-up to the BREXIT year 2019, part of the dampening effects of leaving the EU will be mitigated by the increase of the FDI stock/capital stock ratio, which in turn is likely to reflect a Froot–Stein effect related to real pound depreciation for 2016–2018; (3) to the extent that the UK government will want to reinforce output growth through higher FDI inflows, a reduction of corporate taxation could generate high effects but could also stimulate a downward international corporate tax reduction game. Full article
(This article belongs to the Special Issue Impact of Brexit on Financial Markets)
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9 pages, 1558 KiB  
Article
Brexit and Uncertainty in Financial Markets
by Guglielmo Maria Caporale, Luis Gil-Alana and Tommaso Trani
Int. J. Financial Stud. 2018, 6(1), 21; https://doi.org/10.3390/ijfs6010021 - 11 Feb 2018
Cited by 13 | Viewed by 8021
Abstract
This paper applies long-memory techniques (both parametric and semi-parametric) to examine whether Brexit has led to any significant changes in the degree of persistence of the FTSE (Financial Times Stock Index) 100 Implied Volatility Index (IVI) and of the British pound’s implied volatilities [...] Read more.
This paper applies long-memory techniques (both parametric and semi-parametric) to examine whether Brexit has led to any significant changes in the degree of persistence of the FTSE (Financial Times Stock Index) 100 Implied Volatility Index (IVI) and of the British pound’s implied volatilities (IVs) vis-à-vis the main currencies traded in the FOREX (foreign exchange market), namely the euro, the US dollar and the Japanese yen. We split the sample to compare the stochastic properties of the series under investigation before and after the Brexit referendum, and find an increase in the degree of persistence in all cases except for the British pound-yen IV, whose persistence has declined after Brexit. These findings highlight the importance of completing swiftly the negotiations with the European Union (EU) to achieve an appropriate Brexit deal. Full article
(This article belongs to the Special Issue Impact of Brexit on Financial Markets)
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