The Short-Term and Long-Term Economic Impacts of the Brexit Referendum: A DID and VAR Analysis Using Financial Market Variables to Examine the UK Local Economy

Brexit has profoundly impacted not only international economies but also the local economy of the UK. This study builds upon previous research on the effects of the Brexit referendum, while avoiding the formal Brexit period that overlapped with the COVID-19 pandemic, to examine the short-term and long-term impacts of the Brexit referendum on the UK's local economy. The study innovatively employs the Difference-in-Differences (DID) model, which has not been previously used in this context, to assess the impact of the Brexit referendum on stocks significantly affected by Brexit compared to those less affected. Additionally, the study utilizes the Vector Autoregression (VAR) model and Impulse Response Functions (IRF) to analyze how Brexit-related shocks, specifically abnormal stock market returns, impact key economic variables: the ten-year UK government bond yield and the GBP/USD exchange rate. The findings confirm that Brexit-related news has immediate and lasting effects on market volatility, with significant short-term impacts on the UK's local economy, while the long-term effects are relatively mild.