On the Efficiency of Foreign Exchange Markets in Times of the COVID-19 Pandemic

Faheem Aslam, Saqib Aziz, Duc Khuong Nguyen, Khurram S. Mughal and Maaz Khan

No 2020-010, Working Papers from Department of Research, Ipag Business School

Abstract: We employ multifractal detrended fluctuation analysis (MF-DFA) to provide the first look at the efficiency of forex markets during the initial period of ongoing COVID-19 pandemic, which has disrupted the financial markets globally. We use high frequency (5-min interval) data of six major currencies traded in the forex market for the period from 01 October 2019 to 31 March 2020. Prior to the application of MF-DFA, we examine the inner dynamics of multifractality using seasonaltrend decompositions using loess (STL) method. Overall, the results confirm the presence of multifractality in forex markets, which demonstrates, in particular: (i) a decline in the efficiency of forex markets during the period of COVID-19 outbreak, and (ii) the heterogeneity in the effects on the strength of multifractality of exchange rate returns under investigation. The largest effect is observed in the case of AUD as it shows the highest (lowest) efficiency before (during) COVID-19 assessed in terms of low (high) multifractality. During COVID-19 period, CAD and CHF exhibit the highest efficiency. Our findings may help policymakers in shaping a comprehensive response to improve the forex market efficiency during such a black swan event.

Keywords: COVID-19 pandemic; forex market; MF-DFA; high frequency; efficiency (search for similar items in EconPapers)
JEL-codes: C10 C32 G10 G15 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2020-01-01
New Economics Papers: this item is included in nep-mst
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Citations: View citations in EconPapers (59)

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Related works:
Journal Article: On the efficiency of foreign exchange markets in times of the COVID-19 pandemic (2020)
Working Paper: On the efficiency of foreign exchange markets in times of the COVID-19 pandemic (2020)
Working Paper: On the Efficiency of Foreign Exchange Markets in times of the COVID-19 Pandemic (2020)
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