The Brexit Political Risk and Global Financial Markets’ Responses: A Brief Review of the Literature and Potential Research Directions
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Abstract
Political risk, including political and economic uncertainty, has a significant negative impact on global economic activities. At the firm level, it is also one of the most significant uncertainty shocks, affects firms’ future attitudes toward risks, and plays a crucial role in their decision-making. This article aimed to study the following research questions: 1) Does the danger posed by Brexit have an impact on global stock markets? 2) Does an escalation in the Brexit risk lead to a rise in the demand for safe haven assets? and 3) Does investor attention play a significant role in the financial market reaction to political risks, such as Brexit? Using text analysis methods and various financial data sources, the research findings were as follows:
1. Construction of a Brexit Risk Index: A new political risk index specific to Brexit was constructed, providing a data basis for studying the impact of political risks on global financial markets.
2. Investor Attention and Market Reactions: This study was the first to investigate the role of investor attention in financial market reactions to political risks. It revealed that investor attention significantly affects how political risks were incorporated into stock prices.
3. Cross-Market and Asset Analysis: Unlike prior research that focused on single events or markets, this study analyzed 14 major stock indexes and four major categories of financial assets. The cross-asset and international results enrich investors' understanding of global political risks.
4. Framework for Regulators: The project was expected to provide a framework for regulators of capital markets to identify, monitor, and prevent political risks.
The study concluded that Brexit, as a significant political risk, negatively affects stock prices globally, with China being one of the affected economies. Additionally, Brexit risk spills over to non-equity financial markets. These findings have implications for policymakers seeking to guide financial market recovery and establish corporate resilience strategies in the face of political uncertainties.
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