The Brexit Premium

Abstract

I quantify the impact of no-deal Brexit (the potential departure of UK from EU without a withdrawal agreement) on European equity prices. I document their overwhelmingly negative response upon Brexit referendum results announcements and show that varying degrees of Brexit exposure explain differences in returns on European stocks between July 2016 and December 2019. I show that both results are far more pronounced in the UK than they are in the rest of the EU-15 region - numerous negative projections for various sectors and individual firms in the EU-14 economy are not corroborated by the equity market response. I exploit the cross-sectional variation in European equity returns to construct a Brexit mimicking portfolio tracking latent Brexit shocks over time. I show that it can explain significant amount of time-series variation of European stock market in the post-referendum period. Finally, its correlations with the European stock market indices suggest Brexit constitutes far greater and more lasting a shock to the local UK than the EU economy.