Impact of BREXIT Referendum on Indian Stock Market

Abstract

Immediately after World War II, many European nations felt it was important to unite the European nations to form a union for the economic and social benefits.  However, the dream of a “Common European Union” is still quite far from reality.  The EU is the England’s largest business partner.  Almost fifty percent of Britain’s trade is with the EU. Now, Britain’s decision to leave the EU is a death blow to the EU.  Today, the Brexit is viewed as the next big financial event since 2008 subprime crisis causing dent on the global economy.  History has exhibited that stock market plays a major role in any economy. Stock markets have been impacted by various macro and micro economic factors. Therefore, the main objective of this empirical paper is to investigate the pricing behaviour of the chosen benchmark indices (Sensex and Nifty) with respect to a major political event (Brexit referendum) and its implications for regulators, researchers and market participants.  For the purpose of the study the data has been collected from 24-06-2015 to 19-07-2016 and the collected data has been tested for stationarity by applying ADF test. The event study methodology has been employed to determine the impact of Brexit referendum on India stock market.  In order to capture the historical volatility the standard deviation of the abnormal returns of the selected indices has been computed.  GARCH (1,1) model have been employed to ascertain the existence of ARCH/GARCH effect in the indices. We found a significant impact of Brexit referendum on both the chosen indices on the event day.  Nobody knows the actual impact of the Brexit on the world economy in the long run. The bulk of studies on Brexit referendum have concluded that the impact on the Britain’s economy would be significant and adverse. However, the shock on the European Union would be smaller, although no extensive macroeconomic assessment has been published.