Abstract
We examine the impact of three events related to Brexit on stock prices of UK and European banks: i) the announcement of the referendum date, ii) the referendum result, and iii) the appointment of Theresa May as the British Prime Minister. Our results show that bank shareholders reacted positively to the announcement of the referendum date and to the election of Theresa May as Prime Minister, whereas their reaction to the referendum outcome was negative. The analysis also demonstrates that the impact of different stages of Brexit on the stock market is more dependent on geographical factors than on firm-specific characteristics. The only exception is bank size, which positively affects bank shareholder choices. Our results have important regulatory and managerial implications: new political risks should be appropriately included into scenario analysis and the ability to assess and manage this risk should be taken into account in strategic planning and risk management.
Highlights
The debate on the efficient market hypothesis, which began at the end of the 1960s (Fama, 1965, 1970), remains unresolved
The analysis demonstrates that the impact of different stages of Brexit on the stock market is more dependent on geographical factors than on firm-specific characteristics: the only exception to this is bank size, which positively affects bank shareholder choices
Through an event study analysis, the stock price reactions of UK and other European listed banks to three different events related to Brexit: the announcements of the referendum date, the referendum result, and the election of Theresa May as Prime Minister
Summary
The debate on the efficient market hypothesis, which began at the end of the 1960s (Fama, 1965, 1970), remains unresolved. In the last few decades, the EU has experienced several political events affecting stock market dynamics: among these, Brexit represents one of the most important, and can be a black swan For this reason, the study of the stock market reaction to the announcements of events related to Brexit is important both for policy makers and investors: the former could adjust economic policy measures aimed at achieving the stability of financial markets and the economy as a whole, while the latter might plan their portfolio and risk management activities (Škrinjaric, 2020).
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