Political Uncertainty and Market Liquidity : Evidence from the Brexit Referendum and the 2016 U.S. Presidential Election

This paper examines whether political events create, or resolve uncertainty in financial markets. In the few days following the surprise outcomes of the Brexit referendum and the 2016 U.S. presidential election, bid-ask spreads increase, quoted depth decreases, and volatility increases. We fail to find evidence of deteriorating market liquidity in the minutes preceding the verdicts. These results support the notion that uncertainty about political events increases information asymmetry among market participants, which causes a transitory decline in market liquidity. Overall, our results suggest that market participants respond to uncertain political events by revising their expectations ex-post