Brexit or Bremain ? Evidence from bubble analysis

TL;DR

This study uses an enhanced bubble detection model to analyze financial markets' responses to the Brexit referendum, revealing asset class-specific bubble signals and market expectations.

Contribution

The paper applies an improved Johansen-Ledoit-Sornette model with genetic algorithms to detect bubbles across multiple asset classes related to Brexit.

Findings

Equity and currency markets show no bubble signals.

Rates, credit, and real estate exhibit bubble-like behavior.

Markets expect no immediate crashes or sharp rises post-referendum.

Abstract

We applied the Johansen-Ledoit-Sornette (JLS) model to detect possible bubbles and crashes related to the Brexit/Bremain referendum scheduled for 23rd 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.