How Did the Brexit Timeline Affect Volatility?

Editors note – the following blog was put together by a team of interns from CBOE. 

Nicholas Ghilardi will be a Junior at the University of Illinois in Urbana-Champaign and is majoring in Engineering Physics with a minor in Mathematics.

Gillian Hood will be Junior at Vanderbilt University and is majoring in Economics with minors in Corporate Strategy and Finance.

Noah Silverman will be a Sophomore at Washington University in St. Louis and is majoring in Finance. 

Last Thursday, citizens of the United Kingdom voted to leave the European Union in a historic referendum, known as Brexit, creating turbulent markets on Friday. While the unknown ramifications of the UK leaving the European Union have undoubtedly increased uncertainty in the marketplace, the Brexit-related events leading up to the referendum have also had a substantial effect on our volatility indices. Here is a brief summary of these events:

  • February 20th, 2016: The June 23rd referendum date was announced.
  • May 5th, 2016: Elections were held across the UK.
  • May 27th, 2016: Purdah began, preventing central and local government officials in the UK from publishing material relating to the referendum.
  • June 16th, 2016: British Labour Party member Jo Cox was killed.
  • June 23rd, 2016: Citizens of the UK voted to leave or to stay in the European Union.

Intern Brexit 1



Data Source:  Bloomberg

Here we can see the CBOE/CME FX British Pound Volatility IndexSM (Ticker: BPVIX) over the last three months. This index, which measures the expected 30-day volatility of Britain’s currency, serves as a good measure for political and economic uncertainty in the UK. The relationship between the political events in the UK and the movement of BPVIX can be discerned quite clearly. The advent of the elections in the UK on May 5th marked a point of steady incline for the BPVIX. With the referendum date approaching and an atmosphere of political variability, one would expect the volatility of the British pound to increase. On May 27th, the steady climb of the BPVIX was propelled by the outset of Purdah, the pre-vote period in the UK that restricts government officials from publishing material related to the referendum. This left the public without a clear sense of direction. The BPVIX responded accordingly, as a sharp spike occurred on May 27th. This momentum continued to drive the BPVIX upward until June 16th, when British Labour Party member Jo Cox was killed. While the murder of a politician would usually create panic and uncertainty, the loss of a key figure sparked a surge in Remain-supporters in the polls, as well as a temporary suspension of the Leave campaign. This, in turn, caused the BPVIX to drop sharply, as it seemed the UK was going to remain in the European Union.

Intern Brexit 2



Data Source: Bloomberg

The chart above overlays the CBOE Volatility Index® (Ticker: VIX®) and a Number Cruncher Politics poll, an aggregate of several polls regarding public sentiment towards the referendum over the last three months. While the BPVIX reacted to the events in the UK, the VIX Index, on the other hand, seemed to be more closely correlated to polling data. On June 12th, when Leave overtook Remain in the polling, the VIX Index spiked, to account for the possibility of a Leave victory. In addition to the polling data, this spike may have been a delayed reaction to the BPVIX, which had been steadily increasing. The VIX Index generally discounted the events in the UK until the polls revealed the growing popularity of the Leave campaign. The VIX Index also responded to the death of Jo Cox on June 16th, when it began to decline. This decline was cut short when the referendum results were released, an upset that sparked a very sharp increase in the VIX Index, and financial turmoil worldwide.

Looking at how these indices reacted to events and polling can provide a framework for analyzing volatility indices in the future. The BPVIX, which is designed to respond to uncertainty in the UK, responded directly to Brexit-related events. The VIX, a broader product based on U.S. equity markets, was correlated with the larger events and polling data.