The British Pound on Brexit Night: A Natural Experiment of Market Efficiency and Real-Time Predictability

The behaviour of betting and currency markets on the night of the EU referendum

“…Following the notation of equation 5.1, this gives implied values of GBP L = 1.345, GBP H = 1.499 and △GBP = 0.154. This is similar to the predictions made of the pound conditional on the outcome of the referendum made by various commentators in advance (see Wu et al (2017)).…”

“…There are relatively few studies of referendums because they are unique events and require event-specific approaches. During the preparation of this paper a related study was published (Wu et al (2017)) which investigated the real time response of the exchange rate to the announced vote outcomes. Their conclusion was that the "Brexit result could have been predicted with high confidence under realistic conditions".…”

“…The assumption of no external shocks beyond those affecting the likelihood of Brexit would not be expected to hold over longer time scales, but for the period under study its validity is reasonable. Indeed, the authors of Wu et al (2017) describe the circumstances as "a natural experiment" with "near perfect conditions" to study such a situation. There were no other major economic releases, or significant news events (beyond Brexit).…”

“…Prior to the vote there were several predictions that the pound would sell off significantly in the event of Brexit but rally a little otherwise (see Wu et al (2017)). Let…”

The behaviour of betting and currency markets on the night of the EU referendum

“…Most studies conclude that the stronger forms of the EMH do not hold. For the night of the EU referendum, one existing working paper (Wu et al (2017)) concludes that the pound market was slow to reflect the information contained in the vote results and hence the EMH in the semi-strong form did not hold. Regarding prediction markets, there is a consensus in the literature that prediction markets provide better estimates of future events than experts, and that the predictions of such markets are useful in a variety of situations.…”