The heterogeneous impact of Brexit: Early indications from the FTSE

The UK's decision to leave the EU is surrounded by several studies simulating its potential effects. We take an alternative approach by examining how news of Brexit affected expectations as embodied in stock returns using a two-stage estimation process. While most firms had negative returns following news of the referendum's result (with nearly $3 trillion wiped off global markets), there was considerable heterogeneity in their changes relative to expectations. We show that this heterogeneity can be explained by the firm's global value chain, with firms heavily exposed to the EU and UK doing worse. In addition, we find that firms reliant on imported intermediates also perform worse. This, however, is partially offset via intra-firm trade in intermediates when Sterling fell relative to host currencies. These changes were primarily in the first two trading days and highly persistent. Understanding these movements gives a better understanding of Brexit's potential effects.