Exchange-rate exposure and Brexit: The case of FTSE, DAX and IBEX

Abstract

This paper studies the impact of the United Kingdom's June 2016 referendum to withdraw from European Union membership (“Brexit”) on foreign exchange (FX) exposures. We collect weekly data from 26 FTSE100, 10 IBEX35, and 17 DAX30 nonfinancial multinational companies before and after the referendum. The referendum is shown to have had a positive and significant impact on the returns of the FTSE100 firms. Following the Brexit vote, firm-level FX exposures increased significantly (in absolute terms) for the 26 FTSE100 firms included in this study; however, this was not the case with the IBEX and DAX firms. On the other hand, the Brexit vote led to a reduction in exchange rate exposure at the market level. FX exposures in all three markets are reduced in absolute terms. Asymmetric specification models detect more German firms with significant FX exposures. After accounting for cross-sectional dependence in the residuals of firms within the same country, the majority of our findings are robust.