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Centre for Macroeconomics survey: Brexit to increase market volatility

Excerpt from a VOXEU/Centre for Macroeconomics survey on the impacts of Brexit on financial market volatility

Sterling fell dramatically following the announcement of a date for the UK’s referendum on whether to remain an EU member. This column reports the views of leading experts on whether the possibility of ‘Brexit’ would lead to further volatility in financial markets and the broader economy. There is near unanimity in the monthly Centre for Macroeconomics survey that the Brexit question will increase financial volatility and will pose economic costs in the medium term. Financial volatility can be expected to be especially high if polls remain close. Lack of clarity about the UK’s economic arrangements with the EU following Brexit are the main concern for the medium term.

In late February, UK Prime Minister David Cameron announced that the referendum on the country’s continued membership of the EU would be held on 23 June. Over the following weekend, a number of leading Conservative MPs announced their support for the campaign to leave the EU – ‘Brexit’. The pound sterling declined as trading opened on the Monday morning, losing close to 2% of its value relative to the dollar and 1.5% relative to the euro on the first day of trading following these news stories.

A number of commentators have expressed concern that this is merely the tip of the iceberg and that the run-up to the referendum will be a period of significant financial volatility. According to these observers, this presages the economic and financial troubles that Brexit would bring.

Others have pointed out that financial markets are volatile by their nature, tend to over-react and are hard to forecast. Moreover, the FTSE 100 stock market index actually increased on the Monday following the referendum announcement and held its value through the following week.

A bumpy ride to Brexit

The first question in the Centre for Macroeconomics (CFM) survey1 asked panel members to assess whether the debate on Brexit is likely to lead to a higher level of exchange rate volatility in the coming months.

Question 1: The value of the pound fell sharply this week. Do you agree that the public debate on Brexit can be expected to (continue to) lead to a substantial increase in exchange rate volatility in the upcoming months?

Figure 1. Exchange rate volatility

to continue reading: http://www.voxeu.org/article/cfm-survey-february-2016-brexit-and-market-volatility



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