The Impact of Brexit News and the ECB's Announcements on Asset Prices: Theory, Empirical Findings and Policy Implications

Abstract

It is essential to understand how financial variables, such as stock prices, bond prices and exchange rates, react to various announcements available to the public. The aim is to understand the determination of asset prices (Neely and Dey, 2011) because financial market developments – including foreign exchange market dynamics – are highly relevant for short-term and medium-term economic developments in market economies. Thus, there is a broad interest to understand price dynamics in financial markets from a theoretical and empirical perspective; and possibly also to draw lessons for policymakers interested to avoid excessive volatility and liquidity problems. In this context the role of information and news, respectively, has drawn increasing attention over the past decades in the Economics research community and specific new policy events such as Quantitative Easing (QE) as well as political shocks – such as the British EU referendum of 2016 with its Brexit majority – lend themselves as interesting events that could be analysed with respect to financial market dynamics. The first study investigates the impact of Brexit-related events on the spot exchange rate of the British pound against the euro and the US dollar. We want to find out whether Brexit-related news, including the result of the Brexit referendum itself, has an impact on British pound exchange rates. By splitting our Brexit-related events into ‘good’ Brexit news and ‘bad’ Brexit news, we find that Brexit news has an impact on British pound exchange rates. Bad Brexit news is associated with a depreciation of the British pound against the euro and the US dollar whereas ‘good’ Brexit news appreciates the Pound against the euro. The second study elaborates on the impact of Brexit-related events on the corporate bond yield spreads in the United Kingdom and Eurozone (or Euro Area: EA), respectively. We want to find out whether Brexit-related news, including the result of the Brexit referendum itself, had an impact on the risk conditions in those two corporate bond markets. Our estimation results indicate that the announcement of the referendum result is associated with increasing credit spreads in the UK and EA. However, only the actual announcement of the UK referendum result itself had an influence on the credit spreads. Furthermore, we distinguish between financial and non-financial economic sectors in order to analyse more specific sector-related effects of the referendum event. Our estimation results suggest that UK credit spreads were more strongly influenced by the announcement of the results of the Brexit referendum than credit bond spreads in the Eurozone were. The third study investigates the impact of ECB’s announcements of non-standard policy measures on a broad range of financial assets from Denmark, Norway and Sweden. I find evidence that unconventional monetary policy announcements by the ECB resulted in pronounced spillovers to Denmark, Norway and Sweden. In particular, the results suggest that medium- and long-term government bond yields, corporate bond yields and CDS spreads were affected by the ECB’s announcements of non-standard policy measures. Moreover, the results suggest that benchmark stock market indices and exchange rates vis-a-vis the euro were mainly unaffected by the ECB’s announcements of unconventional monetary policies. Furthermore, I find pronounced spillover effects from Forward Guidance statements, Securities Markets Programme announcements, and Corporate Sector Purchase Programme announcements on financial assets from Denmark, Norway and Sweden.