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Bremia: a study of the impact of Brexit based on bond prices

Many financial prices reacted violently to the result of the UK's advisory referendum held on 23 June 2016. Subsequently financial prices have proved significantly less volatile, both unconditionally and in response to Brexit-related news. We particularly want to understand what sovereign bond prices might have been telling us about the likely state of the British economy under an exit from the European Union and potential policy responses. To do so, we model the factors determining the term structure of interest rates and find that bond yields are driven by macroeconomic factors as well as by central bank communication, which we quantify using text mining techniques. We then map our results to movements in response to Brexit news. We found that bond yields declined in the direct aftermath of the referendum as the result of an anticipation of more expansionary monetary policy, which initially may have offset Brexit-related increases in the risk premium.