How did EU Stock Markets respond on the Eve of Brexit? A Comparison: Before & During Brexit

Sadia Tabassum; Dr. Khuram Shafi; Dr. Samina Nawab

doi:10.36902/rjsser-vol2-iss4-2021(83-95)

Sadia Tabassum PhD Scholar, CUI Pakistan
Dr. Khuram Shafi Assistant Professor, CUI Pakistan
Dr. Samina Nawab Associate Professor, CUI Pakistan

DOI: https://doi.org/10.36902/rjsser-vol2-iss4-2021(83-95)

Keywords: Brexit, Volatility Persistence, Stock Returns

Abstract

This research study examines the response of EU stock markets on the eve of Brexit. Daily data is divided into two sub-periods i.e; before and during Brexit to get a clearer picture. GARCH (1, 1), GARCH-M (1, 1), and EGARCH models are applied to analyze volatility, volatility persistence, deviation in returns, and asymmetric behavior of data in the sample period. The result highlights that stock markets of the UK, Belgium, Netherlands, Portugal, Romania, and Slovenia depicted high volatility during the entire sample period however, volatility increased during the Brexit period. Due to the risk-return swap, the study examined the impact of volatility on returns and observed that stock markets of the UK, Belgium, Croatia, France, Hungary, Italy, Netherlands, Portugal, Romania, Poland, and Spain had positive future returns due to volatility, only before Brexit. Stock markets of all the sample economies are more sensitive to bad news as compared to good news for the whole sample period except for Slovenia and Croatia. The results of the study have implications for investors, policymakers and EU economies.