Brexit referendum and European stock markets: a sector analysis

Abstract

PurposeThe purpose of this paper is to assess the reaction of European stock markets after the UK's EU membership referendum (“Brexit”) on June 23, 2016.Design/methodology/approachThe analysis focuses on asector level by using non-aggregate stock indices across EU-28, the UK and several country subsamples. An event study is performed in order to measure cumulative abnormal returns during the post-referendum announcement period.FindingsThe results indicate an unexpected small number of affected sectors across the country samples. A negative effect is observed in the financial sector across both the EU-28 and eurozone samples, whereas basic materials and health care sectors are influenced positively across the European region. Most of the sectors in the UK display a long-lasting positive effect, while the close trade relationships between the UK and selected European countries seem to partly constitute a driving force of sectors' abnormal stock returns after the referendum.Practical implicationsThe results are useful for global investors, traders and portfolio managers in terms of whether short-term gains from investment choices across sectors can be achieved during periods of increased political uncertainty and whether investors distinguished between sectors.Originality/valueThis paper extends the Brexit literature by using, for the first time, European non-aggregate stock indices. It also contributes to the sector-specific contagion studies by identifying which sectors with similar and/or different industrial composition are more prone to political uncertainty caused by the Brexit vote.