First of all, it's interesting to note that in John 8:12, Jesus says, 'I [Jesus] am the light of the world," but here he says that "You [the Jewish followers of Jesus listening to Him at that time] are the light of the world." One understanding of this is that Jesus is the light source, while we are the light rays. Another way to understand it is that Jesus is the first candle, and each of us are candles that are lit by His flame.
Indeed, the Jewish people were given the revelation of God in order to be a testimony to the world, and indeed God used them to be that in Egypt (Exodus - "that the Egyptians will know there I am the Lord"), in the Babylonian and Medo-Persian empires through the lives of Daniel, Shadrach, Meshach, and Abednego, and in various other ways.
John 1:9 indicates that Jesus gives light to all people. John 3:19 indicates that light has come into the world, but many people have rejected the light.
So, it seems the light is using a physical reality to demonstrate a spiritual reality. The light, then, probably refers to the revelation of God. Jesus was the revelation of God, as He states in John 17. We also are called to testify to the glory of God, so that a people living in darkness can see a great light and come to God in faith.