Market expectation shifts in option-implied volatilities in the US and UK stock markets during the Brexit vote

This paper investigates the effect of Brexit vote on connection between UK stock market expectations and US returns. To gauge expectations, option-implied volatilities FTSE 100 index are calculated in period starting five months before ending four after referendum. keep analysis “clean”, it stops right 2016 presidential elections. It uses an OLS regression to estimate change relationship expectations.The main findings show that markets became somewhat less integrated referendum compared it. The S&P 500 Index returns have a statistically significant impact implied only However, British risk-free rate (LIBOR) factor affecting Brexit. may be used by decision-makers money management industry act appropriately during Black Swan events. When citizens unexpectedly voted favor Brexit, dropped, making cheaper invest, increasing Sharpe ratios equity portfolios. Coupled with increased uncertainty, this caused portfolio reallocations. In turn, expected volatility measured options-implied increased. AcknowledgmentThe authors would like thank Olesia Verchenko for critique, KSE M.A., external defense reviewer helpful comments.