WIIW The Vienna Institute for International Economic Studies - Wiener Institut für Internationale Wirtschaftsvergleiche

Ronald B. Davies

The UK's decision to leave the EU is surrounded by several studies simulating its potential effects. We take an alternative approach by examining how news of Brexit affected expectations as embodied in stock returns using a two-part estimation process. While most firms' prices fell following news of the referendum's result, there was considerable heterogeneity in their relative changes. We show that this heterogeneity can be explained by the firm's global value chain, with heavily European firms doing relatively worse. For firms with few imported intermediates, this was partially offset by a greater Sterling depreciation. These changes were primarily in the first two days and highly persistent. Understanding these movements gives a better understanding of Brexit's potential effects.