The Effect of Brexit on European Financial Markets

Abstract

This study investigates the impact of Brexit on European financial markets by employing a mixed-methods approach that integrates econometric analysis with qualitative policy review. The study applies GARCH, Difference-in-Differences (DiD), and Vector Autoregression (VAR) models to capture volatility dynamics, structural shifts, and systemic spillovers in equity, bond, and currency markets. The results reveal that Brexit significantly amplified market volatility, with equity indices showing persistent clustering around key political milestones and bond yields widening particularly in Southern European economies. Currency markets experienced sustained depreciation and heightened volatility in the GBP/EUR exchange rate, underscoring the sensitivity of foreign exchange markets to political uncertainty.Sectoral analysis indicates that industries heavily reliant on regulatory equivalence, such as banking and transportation, were disproportionately affected, while technology and globally diversified sectors displayed greater resilience. VAR impulse response functions confirm that Brexit shocks propagated across asset classes, highlighting the interconnectedness of European financial markets. The findings also demonstrate structural shifts in financial geography, with the relocation of capital and institutions from London to continental hubs such as Frankfurt, Paris, and Dublin.The study concludes that Brexit has reinforced financial fragmentation in Europe, heightened systemic vulnerabilities, and redefined the trajectory of financial integration within the European Union. The results provide crucial implications for policymakers, emphasizing the need for enhanced risk-sharing mechanisms and deeper integration under the Capital Markets Union framework. For investors and practitioners, the evidence underscores the importance of managing political risk through diversification and adaptive strategies. Overall, Brexit’s legacy represents a long-term transformation in European financial markets, extending beyond short-term volatility to structural realignments that will shape financial stability in the years ahead.