Poll panic

As the polls tighten, there is some market reaction. The BBC reports that “The value of the pound has fallen … by about 1.3% against the US dollar to a 10-month low of $1.61. Shares in some firms with Scottish links have also fallen.”

Over the weekend, YouGov reported the first independently commissioned poll since the referendum was announced that showed Yes in the lead. So the market reaction can be gauged by comparing the close price on Friday 5th September, with the close price on Monday 8th September. However, headline numbers overstate this reaction, since there was a wider market fall than just relating to the independence referendum.

To quantify the “indyref component” we can perhaps construct an “exposed portfolio” and a “counterfactual portfolio”. This is just some informal, back-of-the-envelope analysis, so the method of constructing these portfolios is not at all scientific. Suppose we buy a $100 portfolio at the Friday close price consisting of 50% currency and 50% equity, and sell at the Monday close price. Our exposed porfolio could be Sterling plus Standard Life, RBS, Lloyds and SSE. A counterfactual portfolio could be the Euro plus Aviva, Barclays, HSBC and Centrica (so that all 4 of the Big 4 banks, and the top 2 of the Big 6 energy companies are represented). The selling price of the exposed portfolio was $97.99 compared with $99.30 for the counterfactual portfolio[1].

Sterling fell 1.0% against the dollar, while the Euro only fell by 0.1%. The “exposed” equities fell 3.1% while the “counterfactual” equities only fell 1.3%. Overall then there does seem to be a market reaction in response to the opinion poll changes – but the changes reported in the media are not wholly due to this. We might have expected the “exposed” equities to fall by 1.3% anyway, and the opinion poll only accounts for the additional 1.7% fall, not the full 3.1% fall.

If we suppose that the markets are now pricing in the impact of a Yes vote at the probabilities implied by the YouGov (or the TNS poll last night), approximately 50:50, then we may expect a similar market fall – to the additional falls over and above the counterfactual falls – if a Yes vote is realised.

[1] All data from http://markets.ft.com/research/Markets

About David Comerford

Post-doctoral researcher in economics
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