Brexit or Bremain? Evidence from bubble analysis

We applied the Johansen-Ledoit-Sornette (JLS) model to detect possible bubbles and crashes related to the Brexit/Bremain referendum scheduled for 23 June 2016. Our implementation includes an enhanced model calibration using Genetic Algorithms. We selected a few historical financial series sensitive to the Brexit/Bremain scenario, representative of multiple asset classes. We found that equity and currency asset classes show no bubble signals, while rates, credit and real estate show super-exponential behaviour and instabilities typical of bubble regime. Our study suggests that, under the JLS model, equity and currency markets do not expect crashes or sharp rises following the referendum results. Instead, rates and credit markets consider the referendum a risky event, expecting either a Bremain scenario or a Brexit scenario edulcorated by central banks intervention. In the case of real estate, a crash is expected, but its relationship with the referendum results is unclear. 1 Brexit or Bremain ? On Dec. 17, 2015 the UK Parliament approved the European Union Referendum Act 2015 to hold a referendum on whether the United Kingdom should remain a member of the European Union (EU). The referendum will be held on Jun. 23, 2016, with the following Q&A: • Q: ”Should the United Kingdom remain a member of the European Union or leave the European Union? ─ A1: “Remain a member of the European Union” ─ A2: “Leave the European Union” The two scenarios above were called “Bremain” and “Brexit”, respectively. In case of Brexit decision, there is no immediate withdrawal. Instead, a negotiation period begins to establish the future relationship between UK and EU. The negotiation length is two years, extendible upon agreement between the two parties. For example, the agreements between EU and Switzerland took 10 years of negotiations. Referendum campaigning has been suspended on 16th June 2016 following the shooting of Labour MP Jo Cox. This event has had a strong impact on the public opinion, rapidly changing the opinion polls and possibly the attitude of the country. Forecasting the results of the 23rd June 2016 referendum, given the apparent parity between Bremain and Brexit supporters and the high percentage of undecided voters observed until the week before, is clearly a very challenging task, with a high error probability. Nevertheless, there exist at least three sources of data supporting forecast analysis: opinion polls [8], bookmakers betting odds [9], and market data [10]. In this paper we recur to a different approach, looking for possible bubble signals in historical series of financial data, and interpreting them in terms of Brexit or Bremain scenarios. We stress that such approach does not attempt to predict directly Brexit or Bremain events, but rather looks for information on belief and expectations of market participants about them.