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

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.

The impact of COVID-19 on the stock market crash risk in China

“…Although there is mounting literature examining how investors have overreacted (or underreacted) to the COVID-19 pandemic (e.g., Aslam et al, 2020 ; Schell et al, 2020 ; Yarovaya et al, 2020 ), what drives the stock market crash risk in China has yet to be addressed. It is marginally relevant to consider that the combination of economic uncertainty and behavioral factors positively contribute to financial asset crash risk (e.g., Bitcoin ( Kalyvas et al, 2020 ) and the Chinese stock market ( Jin et al, 2019 ; Luo and Zhang, 2020 ; Ju, 2019 ; Wongchoti et al, 2020 )).…”

Herding behavior during the Covid-19 pandemic: a comparison between Asian and European stock markets based on intraday multifractality

“…We find a growing number of studies on the financial impacts of the Covid-19 pandemic. Recently, various themes have been developed, including financial networks (Aslam et al, 2020c ; Zhang et al, 2020 ), stock market reactions (Aslam et al 2020e , 2021 ; Haroon & Rizvi, 2020 ; Zhang et al, 2020 ), exchange rate fluctuation during the pandemic (Aslam et al, 2020b ; Njindan Iyke, 2020 ), oil market reactions (Apergis & Apergis, 2020 ; Devpura & Narayan, 2020 ), air quality performance and multifractality (Ming et al, 2020 ; Sipra et al, 2021 ), insurance (Wang et al, 2020 ) and gold and cryptocurrencies (Corbet et al, 2020 ). The Covid-19 pandemic has also affected the efficiency of different financial markets.…”

“…The Covid-19 pandemic has also affected the efficiency of different financial markets. For instance, the intraday efficiency of European stock markets (Aslam et al, 2020d ) and exchange rate markets (Aslam et al, 2020b ) declined during the Covid-19 outbreak. Furthermore, Aslam et al ( 2020e ) reported that stock market efficiency varies with the evolution of Covid-19, with decreasing efficiency in February–March (2020) and a recovery in April–May (2020).…”

Inovação Para O Desenvolvimento E a Sustentabilidade De Negócios: Um Estudo Bibliométrico Sobre Pesquisas Relacionadas À Covid-19

“…Tratando-se de resultados financeiros, foi verificado um declínio na eficiência dos mercados cambiais durante o surto de COVID-19 e efeitos heterogêneos na força da multifractalidade dos retornos da taxa de câmbio (ASLAM et al, 2020). Além disso, sob o impacto da pandemia, muitos fatores em diferentes níveis, tais como recursos financeiros insuficientes, baixa capacidade de informatização e falta de coordenação com empresas focais, reduziram a expectativa dos prestadores de serviços financeiros de financiar as pequenas e médias empresas (SONG; YANG; TAO, 2020).…”