Brexit triggered widespread financial volatility across European markets, revealing how deeply interconnected the continent’s financial systems had become, according to new research from the University of Surrey. Using more than two decades of stock market data from across the European Union, Surrey researchers found that Brexit-related political events significantly intensified volatility spillovers between European financial markets. Political announcements, negotiations and leadership changes throughout the Brexit process repeatedly sparked financial reactions that spread across the EU.

The researchers argue that Brexit was not a single economic shock but an extended period of uncertainty. Major political milestones — from the 2016 referendum result to parliamentary votes and trade negotiations — continually reshaped investor expectations and transmitted new signals through European financial markets. The study suggests that the prolonged political process surrounding Brexit created repeated waves of instability that influenced investor confidence and market behaviour across Europe.

The analysis also showed that larger financial markets tended to transmit volatility to smaller ones during periods of heightened uncertainty. France emerged as the most persistent source of volatility spillovers across the EU throughout the Brexit period. At the same time, the UK acted as a major transmitter during the early stages of negotiations. Smaller markets, including Ireland, Portugal and Spain, were among those most affected by the turbulence generated during key Brexit developments.

To examine how these shocks travelled through the financial system, the Surrey team analysed daily market data from EU countries between 2000 and 2021. The researchers combined advanced volatility modelling techniques with a newly developed “Brexit intensity” index designed to track around 500 political and economic developments linked to Brexit. Each event was weighted according to the scale of financial market reactions, including movements in stock returns, exchange rates and market volatility indicators.

Vasileios Pappas, lead author of the study, explained that Brexit represented a prolonged sequence of political shocks that financial markets in both the UK and continental Europe had to absorb in real time. The research demonstrated that major political announcements and leadership shifts repeatedly sent signals through European markets, extending uncertainty far beyond Britain and reinforcing the cross-border nature of financial risk.

The findings also suggest that Brexit weakened financial integration across Europe. Following the 2016 referendum, volatility transmission between EU markets declined sharply, indicating that markets increasingly reacted more independently as political uncertainty intensified. Dr Pappas noted that financial markets remain closely interconnected across borders, meaning uncertainty in one country rarely stays contained. The study concludes that understanding how financial shocks spread through interconnected markets could help policymakers and institutions better anticipate risks and strengthen financial stability during future political crises.

More information: Marwan Izzeldin et al, Brexit and Its Impact on EU Financial Markets, International Journal of Finance & Economics. DOI: 10.1002/ijfe.70149

Journal information: International Journal of Finance & Economics Provided by University of Surrey