Performance of Exchange Traded Funds during the Brexit Referendum: An Event Study

Akram Alkhatib,Murad Harasheh

doi:10.3390/ijfs6030064

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), 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.

Highlights

Introduction and Literature ReviewAccording to the European Central Bank, the global economy has witnessed a deepening of trade and financial integration and associated increase in the relevance of spillovers to the domestic economy from shocks in other economies.1 The liberalization of the capital markets help to enhance market integration, which in effect increase the transmission of market turbulence (Assidenou 2011).Given the increased interrelation among world economies, this paper focuses on the recent Brexit event and how it affected the performance of certain exchange-traded funds (ETFs)
The United States (US) equity market followed the rhythm in the Unites Kingdom’s (UK’s) market; the Dow Jones plummeted 3.5%, the NASDAQ composite index dropped by 4%, and the S&P 500 ended the day 3.5% lower
For the model involving the world equity against the FTSE 250, the ordinary least square regression (OLS) model has a serial correlation in the residuals as the Durbin-Watson (DW) statistics is 2.24, which is far from two

Summary

Introduction

Introduction and Literature ReviewAccording to the European Central Bank, the global economy has witnessed a deepening of trade and financial integration and associated increase in the relevance of spillovers to the domestic economy from shocks in other economies. The liberalization of the capital markets help to enhance market integration, which in effect increase the transmission of market turbulence (Assidenou 2011).Given the increased interrelation among world economies, this paper focuses on the recent Brexit event and how it affected the performance of certain exchange-traded funds (ETFs). According to the European Central Bank, the global economy has witnessed a deepening of trade and financial integration and associated increase in the relevance of spillovers to the domestic economy from shocks in other economies.. The liberalization of the capital markets help to enhance market integration, which in effect increase the transmission of market turbulence (Assidenou 2011). Given the increased interrelation among world economies, this paper focuses on the recent Brexit event and how it affected the performance of certain exchange-traded funds (ETFs). The Brexit sent waves of shocks across the global financial system. Global stock markets wiped about $2 trillion in value. The FTSE 100 retraced about nine percent and the FTSE 250, which is mainly composed of medium-sized companies, declined 7%. The United States (US) equity market followed the rhythm in the Unites Kingdom’s (UK’s) market; the Dow Jones plummeted 3.5%, the NASDAQ composite index dropped by 4%, and the S&P 500 ended the day 3.5% lower

Methods

Results

Conclusion