Impact of Brexit : evidence from stock markets : an event study analysis of the Oslo Stock Exchange and the London Stock Exchange
Abstract
On the 24th June 2016, 52% of the UK population voted in favor of leaving the European Union, also branded as “Brexit”. Since then, speculation has been rife surrounding the impact of Brexit on the global economy. Existing research on this topic does not cover what the effects will be for Norway and what will happen to the bilateral trade between the two countries. Hence, this thesis investigates the impact of the Brexit announcement on the Oslo Stock Exchange (OSE) and the London Stock Exchange (LSE) with STOXX 600 as the market proxy and tests the level of dependence that exists between the British and Norwegian economy. The immediate short-term effects on these two stock markets have been shown via cumulative average abnormal returns (CAAR) with the use of an event study for a sample of 93 and 451 companies listed on the OSE and the LSE, respectively. We also test whether different economic sectors, particularly those involved in high international trade, reacted differently than the rest. This is followed by a discussion about the anticipated long-term risks posed by Brexit for the Norwegian economy. Therefore, this study is aimed at identifying the risks that pose for Norway and its economic sectors.
The results showed that the immediate impact was greater for the LSE than the OSE. The LSE experienced a rapid and severe shock with average abnormal returns (AAR) of -1.47% on the event day, as well as CAAR of -2.98% on the 10th day after the event. STOXX 600 was also negatively affected by Brexit, therefore it is important to keep that in mind when interpreting results for the OSE. With regards to the OSE, its AAR showed a positive response on the day of the event, but we argue it is due to the smaller effect Brexit had on the Norwegian stock market in comparison to the market proxy. On the other hand, we saw that the sectors that are highly reliant on the trade of exports were the ones most vulnerable to Brexit. Consumer cyclicals and industrials were the ones that showed a significant negative reaction on the day of the event. This is also why we detail the importance of other broader issues with respect to international trade such as market access, value chain trade, investment and trade policies to understand the risks that may arise in a post-Brexit world.
Key words: Brexit, Event study analysis, Oslo Børs, Norwegian economy, Uncertainty, Economic sectors