A first look at Brexit and global equity markets

ABSTRACT

Global equity markets fell by nearly 5% overall on 24 June 2016 following news of the Brexit referendum result. Although nearly all EU stock market indices experienced additional significantly negative abnormal returns, especially poor performance was registered by the debt-ridden PIIGS group (Portugal, Ireland, Italy, Greece and Spain). In this article, we identify a systematic tendency for more severe stock market responses to be concentrated amongst countries with higher debt to GDP ratios. This effect endures even after controlling for the degree of openness, EU membership and for being part of the PIIGS group.

KEYWORDS:

• Brexit
• stock returns
• event study
• PIIGS
• BRICS

JEL CLASSIFICATION:

• G15
• F36

Acknowledgement

The authors would like to thank Marc Weidenmier and the Lowe Institute at Claremont McKenna College for their support.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Indeed, Davis’ (2016) GDP-weighted average of national economic uncertainty indices from 16 countries suggests that the post-Brexit values exceeded the 2008–2009 global financial crisis uncertainty level by more than 25%.

² Outside the PIIGS group, the only other market to register a decline of greater than 10% was Cyprus.

³ There is certainly potential for the BRICS’ influence to grow. Even prior to Brexit, Chan (2013, p. 10) saw the Eurozone’s problems leading to a situation where ‘new emerging economies like Indonesia, Mexico, and Turkey may be enticed to join the BRICS to form an economic coalition of convenience…’.

⁴ Stock markets were closed for several countries in the Middle East as well as in Sweden and the Baltic States on Friday, 24 June.

⁵ Allowing for a distance measure based on the number of kilometres from London never yielded significant results when entered in the regression in place of our openness measure.