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The Depreciation of the Pound Post-Brexit: Could it have been Predicted?

Vasilios Plakandaras (), Rangan Gupta () and Mark Wohar ()

No 201670, Working Papers from University of Pretoria, Department of Economics

Abstract: The decision of the United Kingdom to leave the European Union (Brexit) after 43 years caused turmoil in exchange rate and global stock markets. More specifically, the pound relative to the dollar has lost close to 15 percent of its value in the weeks after the Brexit decision. In this paper we attempt to examine whether this sudden depreciation of the (pound-dollar) exchange rate is the reaction of market participants to the Brexit or whether the exodus of UK from the EU had little impact on the exchange rate. In doing so, we train linear and nonlinear econometric and machine learning models and evaluate out-of-sample forecasts of the exchange rate and its realized volatility in the pre- and post-Brexit period. We quantify uncertainty caused by the Brexit according to an index based on news related to economic uncertainty. We argue that in daily forecasting horizon our models adhere closely to the evolution of the exchange rate and that most of the depreciation is based on the uncertainty caused by the Brexit.

Keywords: Brexit; Economic Uncertainty; Machine Learning (search for similar items in EconPapers)
JEL-codes: F31 F37 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-for and nep-mon
Date: 2016-09
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