Expectations and financial markets: Lessons from Brexit

Chen Gu and Ann Marie Hibbert

The Financial Review, 2021, vol. 56, issue 2, 279-299

Abstract: We use the setting of Brexit to investigate how financial markets react to news about political events. We provide robust evidence that political risk is priced by equity markets globally. Furthermore, commodity, government bonds, and currency markets are also affected by political uncertainty. However, our intraday results reveal that markets respond very quickly to political news as changes in the probability of Brexit was impounded into equity prices within 5 min. Our findings also show that investor attention significantly influences the link between the market's expectations of political events and asset prices.

Date: 2021
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