Brexit and financial market volatility

======================================================================

Question 1: The value of the pound fell sharply this week. Do you agree that the public debate on Brexit can be expected to (continue to) lead to a substantially higher level of exchange rate volatility in the upcoming months?

======================================================================

======================================================================

Question 2: Do you agree that the possibility of Brexit significantly increases uncertainty and volatility in financial markets and the economy in general?

======================================================================

Summary

The February 2016 Centre for Macroeconomics survey of experts asked the panel to opine on whether the possibility of the UK leaving the European Union – ‘Brexit’ – would lead to volatility in financial markets and the broader economy. There was near unanimity that the Brexit question will increase financial volatility and will pose economic costs in the medium term. Financial volatility can be expected to be especially high if polls remain close.

Lack of clarity about the UK’s economic arrangements with the EU following Brexit are the main concern for the medium term.

Background

Late last week, Prime Minister David Cameron announced that the referendum on the UK’s continued membership of the European Union (EU) would be held on 23 June. Over the weekend, a number of leading Conservative MPs announced their support for the campaign to leave the EU – ‘Brexit’. The pound sterling declined as trading opened on Monday morning, losing close to 2% of its value relative to the dollar and 1.5% relative to the euro on the first day of trading following these news stories.

A number of commentators have expressed concern that this is merely the tip of the iceberg and that the run-up to the referendum will be a period of significant financial volatility. According to these observers, this presages the economic and financial troubles that Brexit would bring.

Others have pointed out that financial markets are volatile by their nature, tend to over-react and are hard to forecast. Moreover, the FTSE 100 stock market index actually increased on Monday and has held its value through this week.

A bumpy ride to Brexit

The first question in this Centre for Macroeconomics (CFM) survey asked panel members to assess whether the debate on Brexit is likely to lead to a higher level of exchange rate volatility in the coming months.

Question 1: The value of the pound fell sharply this week. Do you agree that the public debate on Brexit can be expected to (continue to) lead to a substantial increase in exchange rate volatility in the upcoming months?

Thirty-nine panel members answered this question. The respondents are nearly unanimous and either strongly agree or agree that exchange rate turbulence can be expected. In the history of the CFM survey, the respondents have never been so united in their views.

Important reasons given for this increase in volatility are uncertainty about the outcome of the referendum and uncertainty about the implications of Brexit. Several panel members predict that volatility will increase if polls show a close race.

Sir Christopher Pissarides (London School of Economics, LSE) expects that sterling will weaken if the ‘Leave’ campaign gains momentum. But uncertainty is expected to remain high even if Brexit becomes highly likely. Sir Christopher Pissarides points to the political fallout from such a result and ‘to the future of the government (and Cameron-Osborne in particular)’ and also to ‘the uncertainties relating to the new trade and financial arrangements with the EU in the event of a no vote.’

Wouter Den Haan (LSE) says that ‘Even if Brexit were a sure thing, then there still would be lots of uncertainty about the UK and European economy in the post-Brexit world. As markets try to understand what could happen and what the likelihoods of these outcomes are, market prices are bound to display a lot of volatility.’ Tony Yates (Birmingham) points to the possibility of another Scottish referendum on independence as an additional source of volatility.

Two dissenting voices disagree that markets will be volatile going forward, but provide very similar views to the majority on the factors that may drive volatility. Martin Ellison (Oxford) and Andrew Mountford (Royal Holloway) both opine that last weekend’s news is likely to turn out to be the biggest event in the run-up to the referendum, so that the worst is already behind us. Andrew Mountford predicts that ‘as time progresses opinion polls will show a clear majority in favour of the UK remaining in the EU and so the uncertainty surrounding the referendum will subside.’

Brexit risks

The second question of the CFM survey asked about the risk that the possibility of Brexit will lead to more uncertainty and volatility in financial markets and the broader economy.

Question 2: Do you agree that the possibility of Brexit significantly increases uncertainty and volatility in financial markets and the economy in general?

Of the 40 respondents who answered this question, 93% either strongly agree or agree that the possibility of Brexit is associated with financial market and other economic risks to the UK economy. This percentage does not change when the answers are weighted with self-assessed confidence level, but the fraction that strongly agree increases from 35% to 43%.

The main concern expressed is uncertainty about the post-Brexit world. Richard Portes (London Business School) notes that ‘even the proponents of Brexit have no clear view of what would happen – indeed, of what they would like to see happen, in regard to our subsequent relationship with the EU.’ Several respondents point to the lengthy and uncertain process of renegotiating access to the single market. As Costas Milas (Liverpool) puts it, ‘we currently have a season ticket in Europe. Why on earth would we want to switch to individual (and much more expensive) tickets?’

As a result of this uncertainty, firms are likely to take a ‘wait and see’ attitude, which will result in a drop in investment. Ricardo Reis (LSE) expects that ‘investment of firms based in the UK with significant international relations will be delayed until the outcome of the referendum is clear.’ Paolo Surico (London Business School) also predicts lower investment in the quarters following the referendum should the ‘Leave’ camp win.

In addition to the direct impacts on the UK economy, some panel members express concerns about the broader national and international implications of exiting the EU. Morten Ravn (University College London) worries that Brexit would trigger another Scottish referendum and may lead to changes in the remaining EU. Panicos Demetriades (Leicester) notes that Brexit could be a ‘catalyst for other significant changes in the EU. It is not impossible that other countries may follow; it is also not unlikely that Grexit uncertainty may resurface again.’

A small number of respondents disagree. Patrick Minford (Cardiff) makes a distinction between financial markets, including the value of the pound, and the real economy: ‘The economy's behaviour depends on fundamentals that will be greatly improved by Brexit. Short-term falls in sterling will actually stimulate the economy in the short run.’

Jagjit Chadha (Kent) agrees with the majority that ‘any increase in uncertainty may impact on consumption and investment plans.’ But he also points out that the uncertainty argument goes both ways: ‘the referendum will resolve membership uncertainty in one direction or the other; it will allow us to get on with the question of Britain's future with at least this question resolved for a generation or more.’

Contact us for more information

How the experts responded

Brexit and exchange rate volatility

Participant Answer Confidence level Comment
Sir Charles Bean London School of Economics Agree Very confident
Angus Armstrong National Institute of Economic and Social Research Strongly Agree Extremely confident
The referendum creates a binary event on a particular day where at least one of the outcomes is uncertain. If the polls are close then the range of outcomes on the day is much higher than it would have been than without the referendum. This is present in the substantial difference in options volatility before and after the event.
Akos Valentinyi University of Manchester Agree Very confident
Silvana Tenreyro London School of Economics Strongly Agree Very confident
David Bell University of Stirling Agree Confident
Uncertainty associated with the outcome of BREXIT will increase volatility. This will be particularly marked if the opinion polls are relatively close. Margins on forward contracts will increase.
Wendy Carlin University College London Agree Not confident
The opening of the campaign is likely to have coordinated behaviour around a (warranted) depreciation. Uncertainty about the outcome is likely to produce further volatility.
Nicholas Oulton London School of Economics Agree Very confident
If the opinion polls give conflicting and changing results as to the likely winner of the referendum campaign, then I would expect exchange rate volatility to be high. This seems quite likely. If on the other hand a clear winner emerges in the polls early on (whether leave or remain), then volatilty will be low. However the level of the exchange rate (up or down) will reflect the expected result.
Alan Sutherland University of St. Andrews Strongly Agree Extremely confident
Panicos Demetriades University of Leicester Strongly Agree Very confident
It is not just the debate that matters, it is also changing perceptions as to a probability of a vote in favour of Brexit. Such a vote would clearly weaken growth prospects and weigh heavily on the exchange rate. It is almost inevitable to see many swings in public opinion as we get closer to the referendum since there is so much at stake.
Gianluca Benigno London School of Economics Agree Confident
Sir Christopher... London School of Economics Strongly Agree Extremely confident
There will definitely be more volatility as the debate progresses and depending on polls. If polls show the yes camp moving ahead the pound will be getting stronger. The uncertainties relate to the new trade and financial arrangements with he EU in the event of a no vote and to the future of the government (and Cameron-Osborne in particular).
Ricardo Reis London School of Economics and Columbia University Agree Very confident
Brexit or not should have a large impact on capital flows and trade balances of the UK. Thus, it should have an effect on the sterling exchange rate, at least relative to the euro. Given how close polls are, the public debate should lead to sharp movements in the probability of Brexit, and these should be followed by exchange rate volatility. But we can look at market data to check this hypothesis, by seeing whether the prices of volatility swaps (or other ways to hedge against this risk) have gone up. I don't have that daily data available in my office, but my impression from other data publicly available is that the answer is yes.
Ray Barrell Brunel University London Agree Very confident
Exchange rate volatility is likely to increase further in the next four months as the membership vote approaches. Exit will probably be associated with lower capital inflows and a lower real (and nominal) exchange rate. As the probability of exit changes, so will the exchange rate. Exit may also result in greater exchange rate volatility being sustained for some time as policy reactions will be harder to judge. We are in for a bumpy few months, and perhaps a rocky few years, with higher short term exchange rate volatility. Exchange rate volatility damages foreign direct investment inflows, and this will cause short to medium term damage to the economy.
Jagjit Chadha National Institute of Economic and Social Research Agree Very confident
Sterling is already rather fragile as the likelihood of a policy tightening has fallen and the recent deterioration in the external position also means that it is vulnerable to shocks. The referendum on EU membership will inject considerable uncertainty into the question of the correct path for Sterling and so we can also expect the release of polling data to lead to sharp swings in the exchange rate.
Wouter Den Haan London School of Economics Strongly Agree Very confident
The possibility of Brexit comes with massive uncertainty in many different forms. Even if Brexit was a sure thing, then there still would be lots of uncertainty about the UK and European economy in the post-Brexit world. As markets try to understand what could happen and what the likelihoods of these outcomes are, market prices are bound to display a lot of volatility.
Martin Ellison University of Oxford Disagree Not confident
Most economists see exchange rates as random walks reacting to news. The question then is whether we expect a steady flow of news that will be significant enough for markets to react. The conclusion of negotiations between David Cameron and the EU was big news, as was the decision of Boris Johnson to come out in favour of Brexit, hence the exchange rate reacted. The only equally large event on the horizon is probably the referendum result itself, so I wouldn’t expect to see particularly large exchange rate movements before then. Most likely the pound will remain weakened or gradually regain its losses without drama, but forecasting future news is impossible.
Fabien Postel-Vinay University College London Agree Very confident
Patrick Minford Cardiff Business School Agree Confident
There is substantial failure to understand that Brexit is about long-run structural reform of the UK economy- leaving the EU will get rid of EU protectionism and regulative intervention from an essentially socially motivated viewpoint in UK economic affairs. It will alsoprotect the UK against further entanglements in the new 'euro architecture'. So in the short run rising Brexit probability will push sterling down. However as understanding of these structural issues increases with the ongoing leave campaign which will combine populism on sovereignty and immigration with sophistication on economics, sterling will recover and may in the end wind up stronger. This will probably make for volatility.
Paul De Grauwe London School of Economics Agree Confident
Mike Elsby University of Edinburgh Agree Not confident
Jan Eeckhout University College London Agree Very confident
Christopher Martin University of Bath Strongly Agree Very confident
The UK is highly dependent on foreign trade and is a major global financial hub. Brexit would be a major dislocation to the UK's financial and trading relationships with considerable uncertainty about what new system would emerge in the aftermath of an exit decision. The electorate seems divided but uninformed and disengaged and responsive to idiosyncratic populist politicians.
Andrew Mountford Royal Holloway Disagree Confident
This should be the moment of maximum uncertainty. At the last general election even if you consider the Conservatives split 2/3 for Brexit then there were less than 40% of the electorate voting for parties in favour of Brexit. Thus as time progresses I think opinion polls will show a clear majority in favour of the UK remaining in the EU and so the uncertainty surrounding the referendum will subside.
Paolo Surico London Business School Strongly Agree Confident
Tony Yates University of Birmingham Agree Confident
There are lots of uncertainties in the run up to the referendum, and these could all lead to fluctuations in the estimated probability of a Leave vote, and it is those fluctuations that are likely to generate movements in the exchange rate. The release of opinion polls, the emerging news about the number of Tory MPs backing Leave, news about the relative numbers in favour of Leave in England and the rest of the UK, and the associated consequences for a second referendum on Scottish independence, the news about the refugee crisis as the weather warms in the Mediterranean, and so on.
Sushil Wadhwani Wadhwani Asset Management Strongly Agree Very confident
The uncertainty engendered by the Brexit referendum will continue to undermine inflows into the UK from foreign investors as they would prefer to "wait and see". We have a significant current account deficit and the drying up of medium-term portfolio inflows requires the pound to fall to levels that seem attractive to shorter-term, speculative investors.We are currently witnessing that adjustment process. O)nce that initial adjustment is complete, the;pound is likely to fluctuate with perceptions regarding as to which side will win. Given that opinion polls are relatively unreliable and volatile, this is likely to spill over into the foreign exchnage market. Of course, once the referendum result is known, a further step adjustment will be necessary in the fx market.
David Smith Sunday Times Strongly Agree Extremely confident
Markets expect that Brexit would result in a substantial markdown for sterling. Any evidence that the chances of Brexit have increased will see selling of then pound, and vice versa.
Jim Malley University of Glasgow Strongly Agree Very confident
Costas Milas University of Liverpool Agree Confident
The exchange rate volatility we are currently experiencing is due to a "systematic component" and an "idiosyncratic component". Systematic component: It makes sense to expect a turbulent period for the exchange rate because not even BREXIT supporters are able to explain to the rest of us what the new "status quo" is going to be. This source of exchange rate volatility will persist in the coming months and is "non-diversifiable". Idiosyncratic component: This has to do with how our government is handling (so far) the referendum issue. Mr Cameron, and rightly so, is putting "heart and soul" into staying in the EU. Fair enough. At the same time, however, senior cabinet members (and prominent members of the Conservative party) are also putting "heart and soul" into exiting the EU. Basically, BREXIT supporters within the conservative party are challenging all arguments made by Mr Cameron and, at the end of the day, his very authority as prime minister. This "pluralistic cacophony" makes the rest of us wonder the obvious: How long will it take before ministers realise that they have to put aside their ideological differences on Europe and get back into dealing with the country's problems? If this does not happen any time soon, exchange rate volatility, driven by this very idiosyncratic component, will turn even nastier.
David Cobham Heriot Watt University Agree Very confident
David Miles Imperial College Agree Confident
Francesco Caselli London School of Economics Agree Confident
Morten Ravn University College London Agree Very confident
There are two sources of uncertainty: (a) will the UK remain in the EU or vote to leave? and (b) what will happen if the UK votes to leave? Both sources have the power to create currency turmoil as it is unclear what will happen to the UK economy. Therefore, I think turmoil will persist unless the polls start to show voters solidly favouring the UK remaining in the EU.
Michael Wickens Cardiff Business School & University of York Agree Extremely confident
Michael McMahon University of Oxford Agree Confident
There are 120 or so days until the June Referendum on Brexit. The costs of Brexit on growth and Sterling are highly uncertainty as it is, but they could be large. Given that the outcome of referendum is extremely close and difficult to call, any relevant new information in the coming months (such as new polls and changing public opinion) will see markets updating their beliefs regularly. Sterling seems to be the main variable reacting to the uncertainty meaning volatile beliefs will lead to volatile exchange rates. Of course, if polls start to indicate a clearer outcome, particularly for staying in, the volatility would subside. But I don't see such being clarity as likely.
Richard Portes London Business School and CEPR Agree Confident
I agree, but I wouldn't focus on volatility - leave that for the finance people, much overemphasised. But if the perceived likelihood of Brexit rises, the sterling exchange rate is likely to fall further. The evidence that Brexit would be significantly negative for the British economy is clear, and those in the financial sector will be particularly sensitive to this. Perhaps most important for the exchange rate, however, would be capital outflow and expectations of a fall in FDI, as well as expectations of a deterioration of the current account.
Charles Nolan University of Glasgow Agree Very confident
The fact is it is virtually unknowable what kind of a trading relationship we will have with what is currently, by far, our major trading partner following a vote to leave the EU. The immediate process to leave the EU will take two years and then following that the UK would have to renegotiate the basis on which it has access to the single European market. The scene looks set for a period of enhanced financial market, including exchange rate, volatility.
Sean Holly Cambridge University Agree Confident
Joseph Pearlman City University London Agree Very confident

Brexit and general volatility

Participant Answer Confidence level Comment
Sir Charles Bean London School of Economics Agree Very confident
Akos Valentinyi University of Manchester Agree Very confident
Silvana Tenreyro London School of Economics Strongly Agree Very confident
Nicholas Oulton London School of Economics Agree Not confident
The crucial issue is what sort of policy Britain would follow in the event of Brexit. Brexit would be a huge shock to the British political system. So future policy would be hard to predict. Who would be in charge? On the other hand other risks might make uncertainty about British policy seem small beer. The election of Marine Le Pen to the French presidency would likely lead to the breakup of the eurozone and even of the EU. This outcome may not seem the most probable one at the moment but any rational decision-maker should take it into account.
David Bell University of Stirling Agree Confident
The probability of the UK exiting the EU is significant. There can be no certainty around the U.K.'s trading arrangements should exit occur. There has therefore been a ramping up of uncertainty across those markets that are directly or indirectly exposed to trade, leading to a more general increase in volatility.
Wendy Carlin University College London Agree Confident
Panicos Demetriades University of Leicester Strongly Agree Extremely confident
Brexit, like Grexit was last year, is an unknown. We simply do not know what will happen afterwards, if I may borrow that expression from J.M. Keynes. Brexit will not just affect Britain. It may prove to be a catalyst for other significant changes in the EU. It is not impossible that other countries may follow, it is also not unlikely that Grexit uncertainty may resurface again, given political developments in Greece. Brexit can prove to be a paradigm shift in expectations. Brexit will add to an already high degree of geopolitical uncertainty around the world.
Alan Sutherland University of St. Andrews Strongly Agree Extremely confident
Sir Christopher... London School of Economics Strongly Agree Extremely confident
The possibility of Brexit increases volatility because no one knows the response of the EU to Brexit and the new relations of the UK with its most important trading partner. Things might even turn out positive after Brexit but there will be a short time of volatility and uncertainty (I don't think the UK will be better off outside but how much worse off it will be is part of the uncertainty generated by the possibility of Brexit)
Gianluca Benigno London School of Economics Agree Confident
Ricardo Reis London School of Economics and Columbia University Strongly Agree Very confident
It definitely increases uncertainty. There are few other political events that would have such a direct and immediate effect on the economy, and especially on international capital and trade flows. I would further expect that investment of firms based in the UK with significant international relations is delayed until the outcome of the referendum is clear.
Ray Barrell Brunel University London Agree Very confident
The possibility of exit will change daily until the vote takes place. This alone will raise volatility and uncertainty in the economy as a whole as well as in all financial markets. Exit itself will give rise to new policies, with potential major revisions to UK trade and investment regulation, as well as to financial market constraints. This possibility raises uncertainty now. Exit will almost certainly reduce sustainable output, as the gains from greater competition are unlikely to be available whatever new arrangements can be put in place. Potential competition and market contestability will be reduced if we exit. The uncertainty about the post exit environment and the impact of exit itself on the economy will be reducing investment and foreign direct investment now, whatever the outcome. Both investment and foreign direct investment will be reduced if exit takes place. Comparisons to the Danish situation in 1992 are designed to assuage fears, but the comparison is false. The Danes refused a Treaty, which would then have failed if it had not been amended. They remained a member of the Union. If the UK votes to leave the Union, negotiations to keep them in will be politically impossible.
Jagjit Chadha National Institute of Economic and Social Research Neither agree nor disagree Confident
Financial markets are already rather sclerotic and this event is simply another global factor alongside oil prices, emerging economies, the US election, Fed policy...I could go on...that markets seem to be unable to handle very sensibly. Any increase in uncertainty may impact on consumption and investment plans, obviously, but given that the referendum will resolve membership uncertainty in one direction or the other, it will allow us to get on with the question of Britain's future with at least this question resolved for a generation or more.
Martin Ellison University of Oxford Agree Not confident
It’s difficult to ignore all the theory which predicts that the possibility of Brexit should increase uncertainty. We see it in the exchange rate data, where six-month implied volatility of sterling is at a four-year high, but so far other markets seem less affected. It’s important to separate uncertainty from volatility – they don’t necessarily go hand-in-hand as there can be a lot of uncertainty but if that uncertainty doesn’t matter for markets then there will be no impact on volatility.
Wouter Den Haan London School of Economics Strongly Agree Very confident
Brexit will affect the European and UK economy in many different dimensions. So there is no reason to believe that volatility will be restricted to exchange rates.
Fabien Postel-Vinay University College London Agree Confident
Patrick Minford Cardiff Business School Strongly Disagree Very confident
Here the question widens and I will just say this. There is a great difference between swings in the exchange rate or short term exchange rate volatility and damage to the economy. The economy's behaviour depends on fundamentals which will be greatly improved by Brexit. Short term falls in sterling will actually stimulate the economy in the short run; consequently share prices will likely move in the opposite direction. Neither volatility is damaging to the economy. Volatility is a fact of economic life; the job of economic stabilisers, such as interest rates and the exchange rate, is to ride out such short term shocks so as to prevent economic damage. The key policy aim must be to get the fundamentals that create growth as right as possible. To this end, and I am afraid contrary to much status quoist economist and civil service opinion, I have to say that Brexit is an important liberalising policy, similar to previous Thatcherist supply side reforms. Its aim is to remove the UK from the protectionist and corporatist regulative environment of the EU and place it firmly back into the world of global competition.
Paul De Grauwe London School of Economics Agree Confident
Ethan Ilzetzki London School of Economics Agree Very confident
No clear plans have been articulated as to the process through which the UK will exit the EU and what the UK's post-Brexit strategy. All pro-Brexit campaigners have stated that they would like to negotiate a new trade agreement with the EU--a process that would take years. In the interim, access of UK firms to their largest trading partner will be in question and the role of the City as the main financial centre for Europe will also be at risk. It is hard to see how this would happen without significant financial and economic turbulence.
Mike Elsby University of Edinburgh Agree Not confident
Jan Eeckhout University College London Agree Confident
Christopher Martin University of Bath Strongly Agree Very confident
Andrew Mountford Royal Holloway Disagree Confident
This should be the moment of maximum uncertainty. At the last general election even if you consider the Conservatives split 2/3 for Brexit then there were less than 40% of the electorate voting for parties in favour of Brexit. Thus as time progresses I think opinion polls will show a clear majority in favour of the UK remaining in the EU and so the uncertainty surrounding the referendum will subside.
Paolo Surico London Business School Strongly Agree Confident
it would seem reasonable to expect many firms to adopt a wait-and-see attitude towards investment, both before the referendum and most likely in the first quarters after that if the NO camp should win. This could prove the classical transmission mechanism through which uncertainty can have significantly negative consequences for the real economy.
John VanReenen London School of Economics Strongly Agree Extremely confident
Tony Yates University of Birmingham Agree Confident
All the uncertainties and news flows that I itemised above will affect not just the exchange rate, but likely the value of the FTSE, the term structure, and general levels of confidence in the economy. It's likely this process has already begun, though we can't see the transmission yet beyond asset markets themselves, and it should be noted that so far stocks have held up relatively well since the referendum date was announced.
Sushil Wadhwani Wadhwani Asset Management Strongly Agree Very confident
Once again, the uncertainty relating to Brexit not only affects the fx market, but is also likely to spill over into the UK bond market. Moreover, corporate investment and hiring decisions are likely to be delayed as firms willf ind it to be rational to adopt a "wait and see" attitude.If we stay in, we will likely see a rebound in corproate spending after the referendum. If we choose to exit, the continuing uncertainty could easily precipitate a fully-fledged recession.
David Smith Sunday Times Agree Very confident
There will be volatility in currency markets and, to a lesser extent, other financial markets. There is a risk that the uncertainty results in weaker economic activity in the run-up to the referendum.
Costas Milas University of Liverpool Strongly Agree Very confident
Brexit worries feed back into higher financial and economic uncertainty. This is because BREXIT supporters have not explained to the rest of us what is going to happen after a possible BREXIT. We currently have in place trade agreements with the whole of the EU. How feasible/fast will it be to put in place individual agreements with the remaining 27 countries? In other words, we currently have a season ticket in Europe. Why, on earth, would we want to switch to individual (and much more expensive) tickets?
Jim Malley University of Glasgow Strongly Agree Very confident
David Cobham Heriot Watt University Agree Very confident
David Miles Imperial College Agree Confident
It seems likely that uncertainty and volatility will rise; of course that does not prove that having a referendum on Brexit is a bad thing.
Francesco Caselli London School of Economics Agree Confident
Morten Ravn University College London Strongly Agree Extremely confident
If it becomes likely that Brexit is the outcome, one has to start considering about the implications of this. It is unclear what kind of deal the UK will get and what will happen to the rest of the EU. It is also unclear whether Brexit will trigger another Scottish referendum. So if Brexit becomes likely, volatility will almost surely increase significantly.
Michael Wickens Cardiff Business School & University of York Agree Very confident
But only in the short to medium term until the uncertainty is resolved
Michael McMahon University of Oxford Agree Very confident
While Sterling seems to be the main variable reacting to the uncertainty about the likelihood and costs of Brexit, I expect that other financial variables will react too in the coming months as information is revealed. The holding of a referendum has been known for some time. However the uncertainty has been crystallised by the announcement of the precise date of the event, together with the revelation of what concessions the EU has offered for continued UK membership of the EU (and the ensuing picking of sides by prominent politicians). While they won last year's election with a majority, the Brexit question threatens to tear the Conservative party apart adding heightened political uncertainty to (rising) economic and financial uncertainty. It will be interesting to see how business and consumer confidence surveys react in the months leading up to the referendum to see how much of this volatility affects real activity.
Richard Portes London Business School and CEPR Strongly Agree Very confident
If the perceived likelihood of Brexit were to rise, then uncertainty in the economy and in the financial markets must rise. Even the proponents of Brexit have no clear view of what would happen - indeed, of what they would like to see happen, in regard to our subsequent relationship with the EU - after a vote to leave. And views on the likely outcome of negotiations diverge widely. How much this would affect volatilities of asset prices is another question - I'd say some, but I wouldn't expect volatility spikes of the degree we saw in the financial crisis.
Charles Nolan University of Glasgow Agree Very confident
A vote to leave the EU will lead to a period of adjustment. Whether that adjustment would be to a tougher trading environment for the UK or a brave new world of free trade and open borders (to goods and services, at any rate), the short term at least will see a negative shock to the economy. The more likely Brexit looks, the more likely volatility in the financial markets will rise to reflect that.
Sean Holly Cambridge University Agree Confident
Joseph Pearlman City University London Agree Very confident