The Impact of Brexit on the Dutch Financial Market
Bachelor thesis at the University of Amsterdam
Thesis supervisor:
Cenkhan Sahin
Bachelor student: Valentijn Maximillian Bolle
Student number:
10736824
Date:
26-06-2018
Working field:
Macro economics
Statement of Originality This document is written by Valentijn Maximillian Bolle who declares to take full responsibility for the contents of this document. I declare that the text and the work presented in this document are original and that no sources other than those mentioned in the text and its references have been used in creating it. The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.
Contents 1. Introduction ... 4 2. Literature Review ... 5 3. Data and Methodology ... 6 Bank choice ... 6 Theory ... 6 Abnormal return standardization ... 8 Test statistics ... 9 4. Results ... 9 Event Study Results ... 10 Analysis of R-squared ... 11 Validity for Dutch Financial Market ... 11 Biases ... 12 5. Clarification of the Results ... 13 Uncertainties ... 13 UK Foreign Direct Investments ... 13 News Analysis ... 14 Dutch and European view ... 14 UK view ... 15 Counter argument ... 15 6. Conclusion ... 16 7. Discussion ... 17 8. References ... 18
1. Introduction
The results of the British referendum on leaving the EU were published on June 23, 2016. The majority of 52% voted for this so-called Brexit, which resulted in an official announcement of the UK leaving the EU on the 30th of March 2019. This was an unexpected event for the EU and for the rest of the world. The UK has been a member of the EU since 1969 and they have strongly contributed in the collaboration and development of the EU ever since (Crafts, 2016). The EU membership causes an open market (single market) between the involved parties. This internal market allows the free movement of people, goods, services and money. The UK will lose those advantages after leaving the EU.
The Netherlands has a close relation with the UK, considering 8% of the Dutch export and 5% of imports comes from trade with the UK in 2015 (Smit & Wong, 2017). The close relation between the Netherlands and the UK is also noticeable on the financial market, because 13% of the Dutch direct investments are invested in the UK and the UKs direct investments in the Netherlands contain 12% of the total received direct investments in 2015 (Hogenboom, 2017). These statistics give a quick impression about the possible magnitude that a Brexit could have on the Dutch financial market, so the next question arises: has the Brexit influenced the Dutch financial market significantly and how can this be explained?
The Brexit has been a popular topic the past three years, but no research has yet been done on the impact of the Brexit on the Dutch financial market. The EU has shown itself vulnerable after the outcome of Brexit, so future equivalent events
should not be exclude (Ottaviano et al., 2014). It would be interesting to investigate if the Brexit affected the Dutch financial market, because it is useful for further research about the consequences where the Netherlands (and Europe) is still dealing with. The outcomes of this paper will contribute to making future estimations about the consequences of other countries that would leave the EU.
In this thesis there will be examined if the Brexit has influenced the Dutch financial market through an event study and it also includes possible explanations for the results of the event study. The date on which the outcome of the British referendum became known will be taken as the event date. The Brexit became definite from this date and uncertainties about the future of the relationship between the Netherlands and the UK arose (Baker, Bloom & Davis, 2016). The appearance of deviations in the security returns of three banks in the Netherlands will being used to see whether the Brexit had an effect on the Dutch financial market. The banks that will be used are ING, ABN Amro and NN Group. The choice of these banks is based on bank size, international involvement and availability of data. The chosen banks are different in each of those aspects, because then the results will give a better representation of the influence on the Dutch financial market as a whole. The event study will show if the actual returns deviate significantly from the expected returns after the event date. May this be the case then can there be concluded that the event had an influence on the security returns. The results have shown that this is the case for all three banks. It proves that there is a significant effect on
security returns of the ING, ABN Amro and NN Group the days after the event.
The Brexit have caused al lot of uncertainties on the financial market in the UK and Europe (including the Netherlands) (Baker, Bloom & Davis, 2016). Therefore have UK and Dutch investments decreased on the days after the Brexit and this resulted in a lower demand for Dutch bank securities.
First, a literature review will be made where the most important analysed papers will be presented. Second, the applying theory will be discussed at methodology. Third the results of the event study will be shown and after this the clarifications for these results will be presented. Finally the conclusions will be drawn, which will be followed by the discussion.
2. Literature Review
In this section, the most important literature will be discussed regarding the clarification of the results. Dhingra et al. discussed the costs and benefits of leaving the EU in their technical rapport, which was published in 2016. They estimated what the welfare effects of the Brexit would be. These estimations give a good example of how economics from the UK saw the economical prospects. The rapport examines the current (at that moment) and possible influence on trade and investments after the Brexit. This rapport is useful to find out what the drive could be to investment more or less in the Netherlands during and after the Brexit. Kierzenkowski et al. (2016) published an article before the Brexit where they investigate the possible consequences of a Brexit, which is called “A taxing decision”. This article is written by
European economics (non-UK) in contrast to the article of Dhingra et al., so they both give different insights on the effects of Brexit.
Emerson et al. (2017) made an assessment on the economic impact of the Brexit on Europe. This assessment was commissioned by the European parliament and gave an overview of economical aspects that could have been influenced by the Brexit. It also includes information about the economical consequences for each country. This assessment shows the European view about the prospects of the EU after the Brexit.
The article of Clarke, Goodwin & Whiteley (2017) examined why Britain voted for Brexit by using the data, which is gathered in a national panel survey conducted before and after the referendum. In their research they investigate what kind of people voted for a Brexit and they looked also at political and economical aspect. The findings of this paper will contribute to the search of why and how investments declined on the Dutch financial market by looking at British motives. Jensen & Snaith (2016) investigated the same thing, what drove the majority to vote for a Brexit, but they looked at this from another point of view. Jensen & Snaith focused mainly on political drives and showed how the Brexit could happen.
The article of Baker, Bloom & Davis (2016) is the last article that is worth mentioning. They developed an index of economic policy uncertainty, which is based on frequently newspaper coverage. Using firm-level data they found that policy uncertainty is correlated with greater stock price volatility and less investment. This article provides a clear connection between uncertainties that arise and lower security prices.
3. Data and Methodology
In this section, the choice of banks will be explained further and the theory behind the event study will be discussed, which includes the abnormal return standardization and test statistics.
Bank choice
This event study is based on the data from three Dutch banks: ING, ABN Amro and NN Group. The ECB has direct responsibility for the supervision of the ING and ABN Amro, because they are “too important to fall” for the Dutch economy and therefore Europe (ECB, 2018). The NN Group on the other hand is a smaller Dutch bank and has no supervision of the ECB. To carry out the event study, the data of the security exchange is needed, so therefore these banks should be public banks. Applying an event study on multiple banks has the advantage that the results can be confirmed or refuted by the other banks, especially when the three banks differ in many aspects. This will minimalize the chance on a type I of type II error (Khotari & Warner, 2006). There has been chosen for one bigger bank, which has many international activities, one bank that is also a large bank, but has less international activities and the third bank is a smaller bank with little international activities. Table 1 shows a recap of important statistics of these three banks in 2015.
The ING does not have the biggest market share on the Dutch financial market, but it is by far the largest bank of those three. The ING has more foreign investments and abroad activities compared to the other three banks. This bank will give a representation of the possible influence of the Brexit on the Dutch financial market, which Market share Yearly revenue in million Foreign earnings ING 19.4% 16,55 70% ABN Amro 21.4% 8,45 20% NN Group 0.7% 1,57 8%
Table 1. Data of the ING, ABN Amro and NN Group from 2015 including the Market share expressed in percentage of the whole market, yearly revenue expressed in million Euros and foreign earnings in percentage of total earnings. Sources: ING (2015); ABN Amro (2015); NN Group (2015).
includes foreign financial distress. This bank will give a representation of the possible influence of the Brexit on the Dutch financial market, which includes foreign financial distress. The ABN Amro is the third largest bank in the Netherlands and focuses mainly on the domestic market (De Nederlandsche Bank, 2015). This bank is less depending from foreign incomes. The ABN Amro will show if there will still be an influence of the Brexit on the Dutch financial market if the international relation is less strong. The NN Group is the third that will be used for the event study. This bank became public in 2014 and has been active on the banking and insurance market ever since. The NN Group will show if the influence of the Brexit is also noticeable at smaller Dutch banks with less foreign earnings. These three banks include different aspects on the Dutch financial market and will therefore represent a better overall picture of the consequences of the Brexit.
Theory
The event study that will be performed in this paper includes a one-day-event study, which means that a much smaller event window will be used. The article of Ederington, Guan & Yang (2015) ‘’Bond
market event study methods’’ shows examples of event studies, which are comparable to the event study and topic of this paper. This article gives commendation about possible biases, the event window choice and the standardization of the abnormal return. The article of Corrado (2011) is highly comparable with the article of Ederington, Guan & Yang (2011), but focuses more on the theoretical part instead of actually performing an event study. The first article has mainly being used for his methodology, but the results of Ederington, Guan & Yang also gave insights in how stocks returns could move.
The results of an event study are based on the abnormal return (Corrado, 2011; MacKinlay, 1997). The abnormal return (AR) is the actual return (Ra) over the period prior to the event (event window) minus the expected return over this same window (Re). 𝐴𝑅 = 𝑅a − 𝑅e Formula 1 According to MacKinlay (1997), the best option for modeling the abnormal return is to use the market Model. The market model implies a stable linear relation between the security return and the market return. In this model the variance will be reduced if the portion of the return, which is related to variation in the markets return, is removed. At the end this can lead to an increase of the ability to discover event effects. The R2 of the market model regression determines the effectiveness of using the market model. The gain will be larger when the R2 gets higher, due the increase of the variance reduction of the abnormal return.
The market model can be expressed with the following formula: 𝑅e𝑖𝑡 = 𝛼𝑖 + 𝛽𝑖𝑅a𝑚𝑡 + 𝜀𝑖𝑡 𝐸 εit = 0 𝑣𝑎𝑟 εit = σ2εt Formula 2 𝑅e𝑖𝑡 = Expected return on period i 𝑅a𝑚𝑡 = Actual return on period m εit = the zero mean disturbance term αi, βi = parameters of the market model
A large amount of data is being used (above 120 data points), so when the estimation window becomes large, the sampling error vanishes (MacKinlay, 1997; Ahern, 2009).
The actual return is given from the data, but the expected return needs to be derived, which can be done with formula 2. Formula 3 shows how to derive the abnormal return.
𝐴𝑅𝑖𝑡 = 𝑅a𝑖𝑡 − (α𝑖 + β𝑖𝑅a𝑚𝑡)
Formula 3 For the market portfolio a broad based stock index is required (MacKinlay, 1997). The security prices of the S&P 500 will be used to derive the expected return by looking at the changes in market return of the Dutch banks in relation with the changes of the S&P 500. This data will be matched with the data of the three banks for the specific period (estimation and event window) to derive the intercept, slope and standard error.
An estimation window and an event window must be determined to fulfill the needs for the market model. The event window is the period before and after the event date and is used to estimate the expected return for each asset and each event. An event window of two data points is being used in this research, so two data points before and after the event date. This event study focuses on one single event, which takes place on one day, so the event window needs to be small to see whether the event has an impact on the security prices after the event date (Ederington, Guan & Yang, 2015; Aït-Sahalia et al., 2010). A window of one day will decrease the possibility on a type II error, because the time of the event worldwide is different in each time zone and the effects could be delayed. A two-day window will give a bigger possibility to include all of the effects in the event window, but is still sufficiently small (2015). The estimation window is the period prior to the event window. According to Bartholdy, Olson & Peare (2007) and Ricci (2015) the standard estimation period for an event study on this time scale is between 200 and 250 observations. This equals roughly a year of daily observations. The event period itself is not included in the estimation period, because a significant difference during and after the event date could influence the estimates for the regression.
Yahoo Finance and Euronext will provide the data for this event study. The total range of the dataset will go from the 8th of June 2015 until the 22th of July 2016. The estimation period and event window of the ING and NN group are chosen according the requirements of the literature. The ABN Amro is only listed since the 22th of May 2015. The Bank was property of the Dutch government before that
Figure 1. Timeline, which represents the estimation and event window for the ING, ABN Amro and NN Group expressed in days relative to the event date.
date, so therefore the available security price data starts on 11th of November 2015, see figure 1. The estimation window of the ABN contains only 147 data points instead of the 262 points that is being used for the estimation window of the ING and NN group. 147 data points still fulfill the needs for a large estimation window (147>120), but are less than the literature would recommend (MacKinlay, 1997; Bartholdy, Olson & Peare, 2007; Ricci, 2015).
Abnormal Return Standardization
According to Ederington, Guan & Yang (2015) and Khotari & Warner (2006) an event test with one event observation will be less accurate when it is not aggregated, so the abnormal returns must be aggregated. The securities do not overlap in the event window, so therefore will be implied that cumulative abnormal returns and abnormal returns will both be independent across securities. The abnormal returns can be individually aggregated to the cumulative abnormal return (CAR) with the following formula: 𝐶𝐴𝑅(𝑡1,𝑡2) =𝑁1 AR t=t1 t 2
∑
𝑖𝑡 Formula 4N = amount of events
N equals one, because only one event will be observed in this event study. Test Statistics The test statistics are described as followed: 𝑇 = 𝐶𝐴𝑅(𝑡1,𝑡2)
var(Car(t1,t2))
= 𝐶𝐴𝑅(𝑡1,𝑡2) 𝜎𝑖𝑡 Formula 5 σ = standard errorThe event study will be used to examine if the returns of the three banks changed significantly after the event date. So the null-hypothesis and alternative-hypothesis are as followed: H0: The event has no influence on the following returns. Ha: The event has influence on the following returns. The test that will be used is a two-tailed test, so to determine the level of significance the alpha should be divided by two. The ING and NN group have a sample size larger than 200, so the critical values correspond with degrees of freedom of 200+. The ABN only has 146 degrees of freedom and it has therefore a different critical value. Table 2 shows the critical values for each alpha for the corresponding banks. ING & NN Group ABN Amro α = 1% 2.576 2.611 α = 5% 1.960 1.977 α = 10% 1.645 1.656
Table 2. The critical value for each alpha and each bank when using a two-tailed test (Keller, 2012).
4. Results
This section contains the event study results, which will be followed by an analysis of the R-squared and the validity regarding the Dutch financial market will be checked. Finally, this section ends with discussing the biases.
Event Study Results
The intercept, slope and standard error can be derived for each bank, as is described in the theory. Table 3 shows the results. These outcomes can be used to derive the abnormal returns. Intercept Slope R2 ING 0.0009 1.2672 0.4261 ABN Amro 0.0005 0.6802 0.0451 NN Group 0.0003 0.4605 0.1810 Table 3. Results of deriving the intercept, slope and R-squared.
Figure 2. Plot of cumulative abnormal return for earning announcements from two days prior to the event date until two days after the event date. Including the ING, ABN Amro and NN group. Table 4. This table shows the results of the event study for the ING, ABN Amro and NN Group. *** 1% significance level. ** 5% significance level. * 10% significance level.
The graph of the CAR shows how the returns of each bank develops in the event period, see figure 2. The CAR drops sharply for all three banks after the event took place. This already indicates that the
event could have an influence on the returns of the securities. The test statistics will be used to see whether this drop is significant. The t-test will give an outcome for each day during the event period, see table 4 for the results. It also shows if the price difference of a specific day in the event period is significant according to the market model.
The declining returns after the event date are significant for all three banks, so the null-hypothesis should be rejected. There can be concluded that the event had a significant influence on the following returns for the ING, ABN Amro and NN Group. As is discussed at Bank Choice has the result of each bank a different meaning for the Dutch financial economy. This will be discussed further at Validity for Dutch Financial Market. Ederington, Guan & Yang (2015) found that market disturbing events get expressed in stock returns with a delay due to a delay in awareness, the time difference between countries and low transaction speed, so this would explain why the change in returns only reflected one day after the event. For the ING and ABN Amro were the changes in returns already noticeable on the event day itself. A possible explanation for the early visibility of declining returns could be that a higher level of foreign distress affects the returns of ING and ABN Amro faster due to the higher international entanglement. The level of significance for the ABN Amro (α=10%) is less strong compared to the ING (α=1%) on the event day. This could be explained by the fact that the ING returns are much more depending on international activities compared to ABN Amro (and NN group). The exact contributions of enhanced internationality will be discussed later at Clarifications of the results.
Analysis of R-squared
The R2 is the percentage of the variance for a dependent variable that can be explained by an independent variable. In this event study the R2 can be seen as the percentage that shows how much of the security’s movement can be explained by the
movements of the S&P 500. ING has the highest R2 of 0.43, which indicates that the different security prices of ING are closer to the estimate prices compared to the ABN Amro and NN Group with respectively an R2 of 0.05 and 0.18. The appearance of a high R2 for ING could be explained by the fact that it has much more foreign activities and therefore has been influenced more by the same events as the S&P 500. Stock markets that interact more with each other tend to have more of the same price movements (Ederington, Guan & Yang, 2015). The relatively low R2 of the ABN Amro and NN group show that the security prices of these banks have less of the same movements compared to the broad stock index that is being used (S&P 500). Reasons for these lower R2 can vary. A low R2 does not indicate if the chosen model is a poor choice according to the article of (Kwon & Shin, 1999).
Validity for Dutch Financial Market
What does a significant influence of the Brexit on the security returns mean for each bank? As was discussed has the ING by far the most international influences due to their high foreign activities. This is in accordance with the relative high R2, because the ING security return movements is more in line with the international broad based stock index that has been used. Only 30% of the income that ING generates comes from domestic earnings, so the ING securities are much more exposed to economical foreign events that could influence ING security prices compared to the ABN Amro (domestic income of 80%) and NN group (92%). Figure 3 shows the geographical distribution of security owners worldwide of the ING.
Figure 3. Geoghrapical locations of shareholders of ING securities expressed in % of all shareholders. Source: ING
(2015).
People who do not live in the Netherlands own 76% of the securities. This means that the influence of the security prices is less depending of Dutch financial activities/events and more depending of foreign activities/events. The ING will give therefore a less precise indication of what the effects of the Brexit are on the Dutch financial market compared to the ABN Amro and NN group. ABN Amro and NN group are much more dependent of Dutch market changes. Both banks have a relatively low R2 compared to ING, as is discussed at Analysis of R-squared, so the international influence that affected the broad based stock index has less influence on the ABN Amro and NN group. The meaning of possible results has been announced at Bank Choice. It said that the ABN Amro is an indication of how big banks that are mainly focused on the Dutch financial market would be influenced by the Brexit and that the NN group is an indication of how smaller banks that are mainly focused on the Dutch financial market bank would be influenced by the Brexit. The results show that the Brexit affected both categories.
Biases
Until now there has only been spoken of the Brexit as only event on June 23th 2016, but there is a possibility that other shocking news was revealed on the day of the Brexit that could have had an influence on the economy. If this were true, the level of influence of the Brexit on the security returns would be different than the actual level of this influence. The possibility of this bias will be further explained at Clarification of the results. The S&P 500 dropped with 2.64% when the results of the Brexit became known (Yahoo Finance). The S&P 500 has been taken as broad based stock index, but if the Brexit also influenced the S&P 500, then the expected return could already have taken the influence of the Brexit into account. Therefore, the abnormal return could be higher than what was calculated. The results gave a significant effect with the used abnormal returns on two of the three banks, so this bias is limited.
The results of the ABN Amro could be less reliable, because of the use of less data. 147 data points have being used instead of the recommended 200-250 data points, as is shortly discussed in Theory. According to MacKinlay (1997) an estimation window needs to include at least 120 data points to create a reliable event study, but the range of 200-250 data points, which Bartholdy, Olson & Peare (2007) and Ricci (2015) retain, is ideal. The bias about the reliability of the ABN Amro is therefore limited.
5. Clarification of the Results
In this section, uncertainties and the foreign direct investments in the UK will be discussed. After this a news analysis will be made and followed by first discussing the insight of Dutch and European view and second the British view. This section ends with examining a counterargument.
Uncertainties UK
The event study has shown that the Brexit had a significant influence on the security prices and returns of three banks in the Netherlands, so the next question arises: why did the Brexit had such an influence on these security prices and what does this mean for the Dutch financial market? The ING, ABN Amro and NN Group have a combined market share of 41% on the Dutch financial market in 2015, which includes mortgages, savings and business loans. According to De Nederlandsche Bank (2015) relies the Dutch financial market heavily on the ING and ABN Amro, so if the Brexit has an influence on ING and ABN Amro it will also affect the Dutch financial market. The unexpected outcome of the Brexit caused a lot of uncertainties on June 23th, 2016 (Kierzenkowski et al., 2016). Uncertainties are the mean reason for declining economic activities and lower returns on securities (Aït-Sahalia et al., 2012; Baker, Bloom & Davis, 2016). The article of Ottaviano et al. (2014) investigates what the cost and benefits are for the UK leaving the EU. They introduced two possible scenarios: an optimistic scenario and a pessimistic scenario. In the optimistic scenario, there would be a GDP loss of 1.23% on the short/medium term and in the pessimistic scenario this loss would be 3.09%. The expected negative economical results
and not knowing what Brexit will mean for the strength of Europe will create a lot of uncertainty if the Brexit would come true. What the effects of these uncertainties could be will be discussed in the next paragraphs.
UK Foreign Direct Investments
The UKs economy relies heavily on the EU single market as was shown in the introduction. 11% of UKs GDP comes from direct trade with EU countries and this trade provides 45% of the UK exports and 50% of the UK import (Office for National Statistics, 2016; Kierzenkowski et al., 2016). People in the UK did not know what the exact economical consequences of the Brexit would be. Baker, Bloom & Davis (2016) did a research on the influence of economical uncertainty and found that if the level of uncertainty grows, consumer and firms have the tendency to wait with their long-term expenses and investments. These findings are in accordance with the claims of Romer. In his book Advanced Macro-Economics (2012), Romer argued that uncertainties would lead to lower investments on the short and long term based on mathematical arguments. The Brexit could have caused that UK households and firms put a hold on their investments on the day of the Brexit out of precaution. The amount of direct investments that the UK invests in the Netherlands covers more than 10% of the total received direct investments (Hogenboom, 2017). The Brexit caused a decline in the demand for Dutch securities, because of the relatively high level of direct investments from the UK. Thus, fewer foreign investments in the UK due to increasing uncertainty is one of the reasons for a decline in the security prices of the Dutch banks. This is especially true for
ING, because 24% of the ING securities owners live in the UK (figure 3).
News Analysis
The unexpected result of the UK leaving the EU had a worldwide impact when looking at several financial indicators. The pound dropped 8% in its worth the day after the announcement of the Brexit, which was the biggest drop in 30 years (Investing, 2018). Also a lot of stock exchanges crashed that day including the FTSE (-3.22%), the AEX (-5.70), the DAX (-6.82%), the CAC, (-7.84%) and the Euro stoxx 50 (-8.50) (David, 2016). Even the Japan’s Nikkei 225 index dropped 7.9% after the UK vote, which was the steepest drop in 16 years (2016). The Brexit caused a shock on the world financial market, because of the uncertainties that arose out of the unexpected result of the UK referendum. The EU is the biggest and most powerful union, so questions will arise about the future of the EU if an important country, such as the UK, leaves this union (Clarke, Goodwin & Whiteley, 2017).
After the announcement of the Brexit, Bob Stovall, of the U.S. equity strategist at S&P Global Market Intelligence, said that in the short-term markets will react through emotion, so people should not become their worst enemy for their own portfolio. He also said that people should remain calm and carry on, but this is not how people reacted if you look at the market activities (Bomey & Krantz, 2016). These abrupt market changes on the day of the outcome of the Brexit referendum might have been caused by other economic news. This kind of news refers to news that would increase the uncertainty for shareholders and investors, which
would lead to a decrease in demand of Dutch securities.
The International Disaster Database did not report any events, natural or technological, that could have had an impact on the economy in Europe nor the rest of the world in de week of the Brexit. Also Dutch newspapers such as the Volkskrant, Telegraaf and NRC do not mention any noticeable economical events that could influence investors’ prospects on the day of the Brexit. The same applies for the UKs biggest newspapers The Sun, The Financial Times and The Guardian.
Dutch and European View
The Dutch newspapers have one thing in common they widely proclaim that the outcome of the UK leaving the EU is something bad for Europe and therefore the Netherlands (Ketelaar, 2016; Vermeend & van der Ploeg, 2016; Gennep, 2016).
The Ipsos MORI Social Research Institute did a survey across 16 European countries after the Brexit and found that 58% of the interviewed people thinks that it was a wrong decision of the UK. These newspapers and articles such as Dhingra et al. (2016b) and Jensen & Snaith (2016), which also proclaim Brexit as something negative for Europe, have contributed to a domestic increase of the idea that a Brexit would be bad for the Dutch and European economy (Strömbäck & Shehata, 2010). Moore & Ramsay (2017) showed in their European media coverage that the European view on the British referendum was mainly focussed on the outcome of no Brexit, because it would be such an impact on Europe, which was hard to imagine. Emerson et al. (2017) derived the expected loss for the EU and this resulted in a cumulative loss of
0.008% of GDP per year, which could go up to 0.044% until 2030. These estimations justify the worries that Dutch (and European) people had before and shortly after the Brexit. When the uncertainties increase prior the Brexit Dutch investors will prefer to wait with investing if the Brexit takes place (Goodwin & Heath, 2016). This could be an explanation for the decreasing security prices after the Brexit. UK View The RISJ/ PRIME research, published in September 2016, found a ‘dominant pro-Brexit bias’ after they
analysed 3,403 articles from nine national newspapers over a period of four months until the Brexit referendum. RISJ found that 41% of the articles were pro-Brexit, while only 27% were against Brexit (Moore & Ramsay, 2017). The most used argument that is in favour of the Brexit proclaims that a Brexit will make the UK more independent, because the UK is paying too much for the EU membership and is limited in their actions according to most of the pro-Brexit newspapers (Becker, Fetzer, & Novy, 2017; Clarke, Goodwin & Whiteley, 2017). The EU high influence of the EU on the UK made some people within the UK feel economical limited according to Clarke, Goodwin & Whiteley (2017). Leaving the EU will make the UK more independent, but a higher level of independency does not mean that the UK would economically be better off (Ottaviano et al., 2014; Jensen & Snaith, 2016). Crafts (2016), Dhingra et al. (2016a) and Jensen & Snaith (2016) claim the opposite, namely that a Brexit would cause economical losses for the UK. The declining economical activities in the UK after the
announcement of the Brexit indicate that people in the UK are aware of the possible negative results of Brexit and as a result they hold their investments the days after Brexit. Jensen & Snaith (2016) examines the political view on Brexit and argued that the majority of powerful groups within the UKs society where not in favor of Brexit, but their influence was limited and the Brexit took place. A clear distinction should be made between the two groups that arose prior the Brexit. Los et al. (2017) shows that the group, which voted in favour of the Brexit exists mostly out of lower and middle class1 workers who are less dependent of foreign trade (directly) and believed that a more independent UK will be better. The other group exist more out of business owners and high-educated2 people and voted against the Brexit. The last group is more likely to have higher earnings (Card, 1999). So overall the group, which voted against Brexit, includes more powerful people and is more dependent of UKs trade (directly). It will give a better view about why investments from the UK could decline after the Brexit on the short term by distinguishing those two groups.
Counter Argument
Most of the discussed explanations for the Brexit point out that after the Brexit people tend to invest less in Dutch bank securities, but there is also a possible consequence that claims the opposite. The Brexit will lead to financial uncertainties for the UK on the short term as is discussed. These uncertainties would be expressed through a lower valuated pound, because of fewer investments from abroad and less consumption (Kierzenkowski et al., 2016). Important to mention is that the Brexit will
hit the economy of the UK the hardest (Crafts, 2016; Dhingra et al., 2016a), so looking at the future uncertainties in the UK it would be better to store your money in another currency. With the prospect of a declining pound it would be a wise choice to invest in economically steady countries, such as the Netherlands (Romer, 2012). The affects of this reasoning are ambiguous, because people tend to wait with consuming and investing and because it was not clear if the Brexit would come true. This aspect is being mentioned because it shows a possible counter argument and this paper tries to include all possible explanations
6. Conclusion
The market model, which has being used for the event study, has shown that the security returns after the event date deviates significantly from the expected returns for all three banks. There can be concluded that the Brexit have caused a decline on the following returns for the ING, ABN Amro and NN Group in the event window. The three banks differ in domestic and international activities and have therefore different influences on their security returns. The ING obtains 80% of their income from foreign activities and has much more influence from the economical changes on the world market compared to the ABN Amro and NN Group (ING, 2015; ABN Amro, 2015; NN Group, 2015; Raddant, 2016). The EU is the biggest and most powerful union, so questions will arise about the future of the EU if an important country, such as the UK, leaves this union (Clarke, Goodwin & Whiteley, 2017). These uncertainties contributed to the drop on the world financial market, which also affected the security returns of the ING negatively. The ABN
Amro and NN group are mainly focused on the Dutch financial market. The amount of direct investments, which the UK invests in the Netherlands, covers more than 10% of the total received direct investments (Hogenboom, 2017). Fewer foreign investments from the UK due to increasing uncertainty could be one of the reasons for a decline in the security prices of the Dutch banks (Baker, Bloom & Davis, 2016). Uncertainties also arose from news, prior the event date, about the possible negative economical effects of the Brexit on the UK and EU. Scientific literature and economical rapports, such as Kierzenkowski et al. (2016), Crafts (2016) and Dhingra et al. (2016a), support these negative ideas about the consequences of the Brexit. Ottaviano et al. (2014) shows what the expected cost and benefits are for the UK leaving the EU and his results are in accordance with the discussed declining economic results of the Brexit. 58% of surveyed Europeans where against the Brexit and identified the Brexit as deterioration of the European economy.
A news analysis points out that there were no other events that could have had a significant influence on the security prices on the event date, so the deviations of the abnormal returns can fully be allocated to the Brexit. This analysis showed that the view on the Brexit differs in the UK compared to the Europe. The people in the UK choose for a Brexit based on UK independency rather than UKs economy growth. A smaller part of the British people voted against the Brexit, but this part included more influential people, such as economics, politicians and investors. That is also one of the reasons that after the Brexit
uncertainties resulted in lower foreign direct investments.
Moore & Ramsay (2017) showed in their European media coverage that the European view on the British referendum was mainly focussed on the outcome of no Brexit. Dutch newspapers also showed that people in the Netherlands where mainly against the Brexit (Ketelaar, 2016; Vermeend & van der Ploeg, 2016; Gennep, 2016), which was in accordance with the global European view. After all the referendum did resulted in a Brexit and created a high level of uncertainty on the Dutch financial market, which in turn led to lower investments and lower security prices.
7. Discussion
Has the Brexit an influence on the Dutch financial market? Using an event study was the best way to approach this question. The right data could be found and no complications arose while applying the event study. The results of the event study were precise and have shown that the Brexit did have an influence on three Dutch banks, ING, ABN Amro and NN Group. These banks have a cumulative market share of 41% and could therefore be used to indicate if there was an influence on the Dutch financial market. The question about ‘’how the Brexit have influenced the
Dutch financial market’’ is broadly approached through looking at the origin of declining returns followed by a search of how this could lead to fewer investments. The outcomes of this research will give a good indication for future estimations of equivalent events. It also gives an overview of possible weaknesses from foreign events on the Dutch banking market.
In this paper, a one-day event study has been used, which corresponds with a small event window of two days. So therefore, the consequences of the Brexit were only being investigated in a range of two days after Brexit. This narrows down the possible magnitude of the Brexit. For future research, it would be interesting to have a long-term event study were the returns of Dutch banks would be observed for a year (for example) to see how the impact of the Brexit on the Dutch financial market evolves.
The banks that have been used were three totally different banks, ING, ABN Amro and NN Group, but it would be an improvement to look at all Dutch banks including the small banks. This will give only a problem, because most of the other banks are not listed. To examine what the amount of received investments were on the days after the event would be a solution, if the banks would make this public.
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