The Effect of Brexit on the GBP Exchange Rate

Abstract

The outcome of the Brexit referendum was unanticipated by the financial market and due to the concept of a country exiting the EU being completely new no one knew what to expect. This led to uncertainty which was not helped by the constantly changing deadline of Brexit. As a result, the financial market suffered. The aim of this research is to gain a clear understanding of the effect Brexit has had on the value of the British pound compared to the Euro during the referendum and following negotiation period between the EU and the UK. The research was conducted through a quantitative approach, more precisely an event study. Nine key events of Brexit were identified and the exchange rate data of the GBP/EUR for the relevant timeframes was collected and used to calculate the normal, abnormal and cumulative abnormal returns. In order to get more conclusive findings two different approaches were used for the normal returns, constant and non-constant normal return. The findings suggest that the fluctuation of the GBP exchange rate is connected to Brexit and that Brexit does have short term effects on the spot exchange rate of the GBP exchange rate. Events perceived as positive led to an appreciation and events perceived as negative led to a depreciation. These results are not a surprise as they correspond with the results of previously research. For future research it is recommended more events are used within the event study as the Brexit period is a big timeframe. In addition, the research could also be helped along by using more than just the GBP/EUR exchange rate. Lastly to gain a deeper understanding of the topic a mixed method approach could be used. Interviews would be a good way to find out more about the personal reason’s investors wanted to invest or not invest.